TOCOM Energy

Recent crude oil market was characterized by an exacerbated market volatility with oil prices falling toward a weekly loss. After reaching a last-minute deal after a week of tense negotiations, OPEC+ members have agreed to slash their output by approximately 2.2 million barrels per day (bpd) and will remain in place until the end of March.

However, oil futures prices settled more than 10% lower after OPEC+ announces the output cuts, while prompt month calendar spread fell to the lowest level since the start of the year as the market continue to price in a possible return of supply glut.
The profit margins for refined fuels have fallen with crude oil flat price in recent trading sessions, weak refining margins may mean lower appetite for crude. Market reaction to OPEC announcement underscores the uncertainty about the effectiveness of the planned cuts, as some traders had anticipated more fresh cuts from the group，going over and above what Saudi Arabia or Russia have already curbed from their output, at least when demand is typically at its lowest of the year.

Market concerns about the depth of supply cuts was also aggravated by a lack of clarity around the new agreement and compliance level.
According to OPEC press release, the latest agreement is made up of several layers of cuts announced since October 2022, more specifically, the new voluntary cuts are calculated from the 2024 required production level as per the 35th OPEC Ministerial Meeting held on June 4 2023 which is broadly unchanged with the level set during October 2022, and are in addition to the voluntary cuts previously announced in April 2023 and later extended until the end of 2024.

Among the producers with large capacity, Saudi Arabia’s voluntary reduction is straightforward, at a consistent 1 million b/d since July.
Russia agreed to reduce its exports by 500,000 b/d, which include 300,000 b/d of crude and 200,000 b/d of products, and this cut will be calculated from the May and June 2023 export average. Earlier, Russia has agreed to undertake two separate reductions in oil supply: in April it decided to cut crude output by 500,000 b/d until the end of this year, while in August it said it would reduce exports by 300,000 bpd until the end of this year. The different yardsticks have made it hard to assess Russia’s commitments since the summer.
Complicating the math, it was agreed in June that the UAE’s allocation would increase by 200,000 b/d from 2024 — the only upward revision made at the time. The country’s latest cut will be made based off the higher 2024 level. So in terms of actual supply, the UAE stands to increase its oil production by 37,000 b/d under its January target, rather than cut. Taking this into account, the volume of actual oil supply being curbed by the new voluntary cuts in practice drops from 700,000 b/d to 500,000 b/d.

Outside of UAE, some OPEC members with large capacity historically struggle in compliance with planned cuts, leading to some market skepticism about the actual magnitude of cuts that will be implemented.
So traders will be closely watching for signs of strict adherence to the cutbacks, which would likely result in a more balanced market over the first quarter of 2024.