In a recent move aimed at stabilizing oil prices, OPEC and its allies within OPEC+ agreed to extend and deepen production cuts into the first quarter of 2024. However, the expected positive impact on oil prices did not materialize as Brent crude slid below $80 per barrel in Asia on Monday morning after an initial surge.
The total production cuts for the first half of 2024 amount to 2.2 million barrels daily, equivalent to about 2% of global supply. Despite the substantial reduction, concerns arose over the effectiveness of the cuts as reports emerged of internal disagreements among OPEC members regarding production levels.
Raad Alkadiri, an analyst with Eurasia Group, remarked, “The market is going to test OPEC+ and whether $80 a barrel is really a floor they can defend.” The voluntary nature of the cuts, while undermining their psychological impact, may still exert influence on the market if fully realized.
Some industry observers suggest that the lackluster response in oil prices could indicate a divergence between OPEC’s optimism about oil demand and the more pessimistic outlook presented by entities such as the International Energy Agency. There are also concerns about weak global economic growth, contributing to a bearish sentiment among traders.
The growing role of algorithm-driven trading is a significant factor, with commodity trading advisors using algorithms to make up 70% of the total daily average volume in the oil futures market. This trend suggests an increasing disconnect between the futures market and physical oil demand.
Analysts, including Paul Sankey, raise the possibility that OPEC might face challenges controlling oil prices as algorithmic traders, known for trend following and exaggeration, could disregard attempts to influence supply and prices. This poses risks, particularly for U.S. producers, who, despite slower growth, set production records this year.
Saudi Arabia, a key player within OPEC, could face a dilemma between opening the taps to flood markets with oil or making even deeper production cuts. The latter, though risky given the market’s response to the recent cuts, might be perceived as a less hazardous alternative.
Reuters’ Clyde Russell highlighted that skepticism in the market was fueled by news of internal disagreements within OPEC, raising doubts about members following through with agreed-upon cuts. The complex situation for OPEC is further complicated by the divide between the physical market, appearing healthy based on seaborne oil volumes, and the futures market, where algorithmic trading dominates.
As the oil market navigates these complexities, the coming year will be closely watched to gauge the effectiveness of OPEC’s strategies and their impact on global oil prices.