Oil Traders are Unfazed by Potential OPEC+ Production Cuts

Prices slide to critical level for Saudi Arabia, setting up showdown between cartel and speculators

Oil traders are betting prices will continue to drop despite the best efforts of producing countries to boost them.

Prices have slid since the Organization of the Petroleum Exporting Countries and its allies, the coalition known as OPEC+, jolted markets in October by cutting production by 2 million barrels a day. A February vow from Moscow to curtail another half-million barrels and a voluntary April move by eight OPEC+ members to cut 1.2 million barrels more haven’t stopped the slide.

Futures for Brent crude oil, the international benchmark, have lost more than 20% since the October cuts, settling at $72.66 a barrel on Wednesday. That is below the estimated $81 that Saudi Arabia—the de facto leader of OPEC—needs to balance its budget.

The cuts have been countered by new petroleum from non-OPEC+ countries, by the prospects of economic slowdown and crisis, and by Russia’s unexpectedly robust oil exports despite Western sanctions. Bullish analysts have repeatedly lowered their forecasts. Bullish traders have been repeatedly burned.

The result: lower prices at the pump, lower home heating bills for many, and lower stock prices for energy companies such as Exxon Mobil and Chevron. Their shares have slid 7.4% and 16%, respectively, this year despite broad market gains that have sent the S&P 500 index up 8.9%.

Now, with OPEC+ facing challenges ranging from its own internal squabbles to the encroachment on its market share by countries such as the U.S., Canada and Brazil, analysts are laying odds on whether the coalition will cut again, or hold fast this weekend.

Many traders appear to be betting on the latter.

A Standard Chartered report last week noted that more crude was sold in the futures and options markets in the prior four-week period than in any similar stretch since November 2018. The selling of the equivalent of 60 super tankers of fuel plunged the index the bank uses to track speculative trading to a low matching the one it hit at the start of the pandemic in 2020.

The next day, the Saudi energy minister threatened more reductions by telling speculators to “watch out.” He was contradicted two days later by a senior Russian official who said cuts aren’t in the cards this weekend, in his opinion, and that Brent would likely rebound to $80 on its own by the end of the year.

The conflicting statements, and a dearth of evidence that Moscow has pruned production as promised, might be emboldening the bears. Before OPEC+ was formed in 2016, a U.S. shale oil boom had dented OPEC’s market share and its ability to control prices. By teaming up with countries including Russia, the world’s third-largest producer, the cartel expanded its portion of global output to nearly 60% from about 40%.

With Russia’s priorities now shifted by war and Western sanctions, some analysts said that OPEC+ is effectively defunct and that Saudi Arabia, the world’s second-largest oil producer behind the U.S., is essentially on its own.

“We’re back into the old world of OPEC where most of the important decisions are being made entirely in Riyadh rather than Vienna,” said Jeff Colgan, a professor of political science at Brown University.

Colgan argued in a 2014 paper that OPEC has far less sway than it is often given credit for, because member states routinely cheat on their production quotas.

Other OPEC watchers note that in recent years the cartel has had trouble meeting its targets, let alone exceeding them, because of trouble in member countries such as Venezuela and Nigeria. In addition, Saudi Arabia has shown a willingness to use its world-leading spare production capacity of roughly 2.5 million barrels a day as a cudgel to keep transgressors in line. At the start of the pandemic in 2020, for example, Russia refused to trim its output until Riyadh drove the price of Brent into the 20s by flooding the world with crude.

OPEC+ countries now comply with their quotas to avoid triggering another such episode, said Standard Chartered’s head of commodities research, Paul Horsnell.

OPEC+ members might be more inclined to support prices with steeper cuts than in the past, said Jorge León, an analyst at Rystad Energy who once worked for the cartel, because their market share has become less of a concern.

For one thing, this year’s jump in non-OPEC+ production growth looks unlikely to be repeated in the near future, according to Rystad’s analysis. In addition, U.S. shale oil producers no longer marshal legions of drilling rigs in response to price surges as they once did, choosing instead to funnel their windfalls to shareholders.

“You can swallow this year’s cuts because you know that 2024 looks a bit brighter to you,” said León.

To be sure, many traders still trust OPEC’s power. One, at a European bank, said that “nobody is afraid” to sell options that will pay off if Brent breaks below $65, which he interprets as faith in a $70 “OPEC floor” on prices.

Hari Hariharan, chief investment officer of the macro hedge fund NWI Management, said he is now betting that oil prices will rise, in part, because it is the single commodity that has a constituency such as OPEC that “truly cares” about it.

“At these price levels, to be bearish oil could be injurious to health,” Hariharan said.