OPEC’s Surprise Move

Last week’s announcement from OPEC to call off the scheduled JMMC meeting this weekend came a shock to everyone.

Not even the people mostly closely following the oil market had any idea that this would be done, days before the meeting was to take place in Vienna. The OPEC has announced a postponement until 30 Nov 2023, and will now be held online.

The reasons cited was Saudi Arabia not coming to an agreement with some of the production levels from African countries.

We, at MacroVisor, tend to think there is more to the story than that. We keep a close tab on the oil industry and OPEC, not just because it’s an asset class we cover but also because we have clients in the industry.

As we went over our research into the quotas, cuts, and production levels, a very different picture has emerged and what seemed odd at first has become much clearer.

I don’t have any inside knowledge of what goes on in the OPEC, and contrary to what you read in the news, no one really does. If something does come out to the media, it’s because they have allowed it to be published.

The OPEC+

Just to avoid confusion, here’s the list of OPEC and OPEC+ countries.

Quotas

The quota system has always been a bit of an issue with the OPEC and OPEC+ countries.

As of the last meeting, there were several decisions made:

• Voluntary cuts were extended until December 2023 from May 2023. These are cuts that were put in place across various OPEC and non-OPEC members as you can see in the chart below. (Column 2)

• The cut for Russia was instated at -500,000 bafrrels per day based on their production in February 2023, after adjusting for sanctions and price caps.

• Other than Russia, the largest production cut was accepted by Saudi Arabia, also at 500,000 bpd, followed by Iraq at 211,000 bpd and UAE at 144,000 bpd.

• Targets were set for 2024 at levels lower than actual production targets for 2023, overall.

• However, targets for Angola, Congo and Nigeria were subjected to independent assessment and review. But, more importantly, what they did is cut targets here and largely re-allocate the targets to the UAE. If you recall, the UAE wanted to pump more and they were demanding a higher quota for a while. This was partially fulfilled in the June meeting.

• Finally, Saudi decided on an extra 1 million cut to stabilize oil prices. Nicknamed the “lollipop cut” now, after the Saudi oil minister made a comment about delivering a lollipop to oil traders.

• Russia’s cut increased by 300,000 barrels per day, i.e., production to be decreased by that amount. (Some of this is a bit confusing because Russia’s production cut has been calculated based on their February output levels).

• Most importantly, there are three countries that are part of the OPEC but do not have any quotas - Iran, Libya and Venezuela.

Price of Oil

True to form, these voluntary and additional voluntary cuts caused the price of oil to increase from June onwards. Brent Crude reached $95/bbl on 28 Sept. Prices rose right up to the OPEC+ meeting on October 4, when prices dropped into the announcement of the additional expectation of the cuts being extended. Then came the war in the Middle East and that sent oil prices back up on fears that oil supply would be disrupted.

Coming into November, the price of oil started to drop and Brent still remains around $80/bbl.

Production Levels

Now here comes the interesting part. Over this time period that production was supposedly to be reduced, not everyone reduced production.

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