Weekly Wisdom – October 6, 2022

By Hightower Great Lakes on October 6, 2022

OPEC Announces a 2 Million Barrels Per Day Cut to Production Targets

On Wednesday, October 5, the 45^th meeting of the Joint Ministerial Monitoring Committee (JMMC) and the 33^rd OPEC and Non-OPEC Ministerial meeting took place at the OPEC Secretariat in Vienna, Austria.

The JMMC’s responsibilities are to “monitor the conformity of the voluntary production adjustments, review market conditions and recommend further decision to the DoC Ministerial Meeting.”

In other words, they help advise OPEC. OPEC tends to take the advice of the JMMC, and that is exactly what happened in the October 5^th meeting.

OPEC decided to cut their production targets by 2 million barrels per day (mbpd).

These current production targets will begin in November and run through December 2023. OPEC has notably struggled to meet their current production targets due to capacity constraints, missing by 3.58mbpd in August and 2.9mbpd in July.

Therefore, the target cut may be a bit less meaningful than the headline leads one to assume, since OPEC has recently been missing their targets by over 2mbdp.

But this quota cut will most likely translate into some sort of production cut, even in the face of slower global demand.

S&P global estimates still expect the actual amount of production cuts to be 800,000 bpd, which will come from Saudi Arabia and the UAE.

So, while likely less than the 2 million headline, there will be an impact, especially headed into the winter months and amid current tensions in the Ukraine/Russia war.

One caveat: Short term, the Biden administration is expected to continue the Strategic Petroleum Reserve (SPR) program release.

While shorter term this could offset the OPEC+ production cuts, the longer-term implications will be a tighter market – especially since the SPR reserves are near 40-year lows.

White House Policy Response Uncertain

As of September 8, the White house has put out mixed signals regarding extending the SPR release program.

Energy Secretary Jennifer Granholm said that Joe Biden’s administration is “weighing the need for further releases of crude oil from the nation’s emergency stockpiles after the current program ends in October.”

Contrary to this quote, another Department of Energy official then made a statement to Reuters a few hours later saying, “The White House was not considering new releases from the U.S. SPR at this time beyond the 180mb that the president announced months ago.”

On September 13 (five days later), the Biden administration announced that it was contemplating refilling the SPR when crude prices fall below $80 per barrel, which could prove to be more difficult now. It all remains in flux.

OPEC Alliances Appear to Shade the U.S.

This 2mbpd cut was the largest cut since the May 2020 agreement, which stated that OPEC will cut crude oil output initially by 9.7mbd and then gradually produce more through April 2022.

The key reason, cited by OPEC, for this announced cut is the risk of a recession and, therefore, a deterioration of oil demand.

More importantly, the OPEC ministers denied that this quota cut had anything to do with politics. We will not opine on the political situation – we just analyze the facts.

The goal of the SPR releases along with 60mb of allied nation’s releases was to compensate for oil supply shocks, resulting from the Russian/Ukraine conflict.

So far, these releases have worked with front month crude oil contracts (WTI) settling at $90.66 on August 3, which is below pre-Russian invasion levels.

These falling crude prices have translated to easing pain at the gas pump. As of Sept. 13, the national average price of gas in the U.S. had fallen for 91 straight days.

Unfortunately, due to the OPEC quota cut, the trend of falling gas prices is likely to reverse. Patrick De Haan, of Gas Buddy, estimates that the cut will result in the average price of gas going up by anywhere from 15 to 30 cents per gallon.

But at some point, the government will have to replenish the SPR, which would change the supply/demand dynamic even further, whether it’s in October or November. The U.S. has now depleted its SPR to its lowest levels since 1984.

Many European countries are preparing for energy shortages this winter, and there is clearly no signal of support from oil producers internationally, with now-limited reserves and below-average U.S. commercial inventories.

Click here to read last week’s Weekly Wisdom (9/28).

SOURCES

¹ Source: S&P Global

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