The Organization of the Petroleum Exporting Countries and allies are in a dilemma with its decision to increase oil output from December.
OPEC+ and Saudi Arabia are scheduled to increase production by 180,000 barrels per day from December as part of a plan to reverse some of its voluntary production cuts.
Eight members of the OPEC+alliance, including Saudi Arabia and Russia have been cutting production voluntarily by 2.2 million barrels per day since the beginning of this year.
The question remains whether the planned increases from December is the right move for the cartel.
A Reuters report earlier this week claimed that OPEC may delay its planned increase from December as oil prices briefly fell below $70 per barrel.
James Hyerczyk, author at Fxempire.com, said in a note:
OPEC+ members could finalize this decision as early as next week, supporting current price levels as the market anticipates tightened supply.
However, the decision may not be so easy.
Oil prices rise again
After plunging more than 6% to trade at their lowest levels since the start of October, oil prices have regained grounds over the last couple of sessions.
One of the major reasons for that is heightened geopolitical tensions in the Middle East.
Reports claimed that Iran was preparing an attack on Israel through Iraqi territory, possibly before next week’s US elections.
Oil prices have surged nearly 3% on Friday, and Brent prices are near $75 per barrel once again.
West Texas Intermediate prices have climbed back over $70 per barrel, and were around $71 at the time of writing.
As tensions continue to simmer in the Middle East, oil prices are expected to remain volatile for the upcoming weeks.
Israel and Iran have been at loggerheads since October 1 when Iran carried out strikes over Tel Aviv.
Israel retaliated last Saturday with strikes on Iran’s military targets.
If tensions further escalates, oil supply from the region will be at risk.
Iran supplies around 4% of the total world supply, and China gobbles up most of its exports.
In the event that Iran attacks Israel, and the latter retaliates by targeting oil facilities of Tehran, prices could shoot up over $80 per barrel, according to experts.
Market share
One of the primary reasons for OPEC+ to increase production from December is regaining lost market share.
Saudi Arabia had indicated last month that it is prepared to regain market share at the expense of lower oil prices.
However, it is not clear if the Kingdom would tolerate oil prices in mid $60 per barrel.
Brent prices had touched a one-month low of $70.72 per barrel earlier this week.
Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report:
In the short term, the oil price will be determined by the production plans of the eight OPEC+ countries.
“Although most of the production cuts are fixed until the end of 2025, a withdrawal of the voluntary cuts could result in an oversupply that would put further pressure on prices,” Lambrecht said.
In the past couple of years, OPEC+ and particularly Saudi Arabia have lost a hefty amount of market share to non-OPEC oil producers such as the US.
Hefty production cuts
The voluntary production cuts by eight members of OPEC+ are on top of 3.6 million barrels per day of oil output cut.
Currently, total oil production cuts borne by OPEC+ amounts to 5.8 million barrels per day.
This is at historic levels, barring the period during COVID-19 pandemic, when demand fell sharply.
OPEC+ is also withholding around 6% of world’s oil supply by adhering to the above production cut quotas.
Most of the countries within the cartel depend on oil exports to fund their economic activities.
Experts believe Saudi Arabia may face challenges in making other members of the cartel adhere to the planned production increase from December. Members may not tolerate further fall in oil prices.
The desired price level for OPEC producers is above $80 per barrel, which is the breakeven price.
Prices are already significantly below that level.
Demand concerns
Analysts with Commerzbank AG believe that even if OPEC pushes its planned production increase by a month, it may not result in a significant price rise.
This is basically because of poor demand from China, the top importer of crude oil.
“If the postponement is announced at the beginning of next week, this should support prices.
However, they are unlikely to rise significantly, as China’s crude oil imports, which are due to be published on Thursday, are likely to bring demand concerns back into focus,” Commerzbank’s Lambrecht said.
China has been struggling with its economy, and imports of crude oil have fallen over the last few months.
Stimulus packages announced by the Chinese government have failed to reignite hopes of a faster recovery of the economy.
Commerzbank believes, at present only hope for a significant rise in oil prices depend on geopolitical tensions, which continue to simmer.
The latest development indicates that Iran may retaliate against Israel by launching drones and missiles from Iraq.
Lambrecht noted:
At the beginning of the week, oil prices had fallen significantly after the Israeli retaliation last weekend spared Iran’s oil and nuclear facilities, leading to the expectation that no further escalation would occur. This hope now appears to have been called into question, suggesting that the pricing out of the geopolitical risk premium in the oil market may have been premature.
OPEC ministers may yet choose to wait and watch for the time being and not jump to a decision right away.
But, either way the cartel has a tough decision to make come December.
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