After several weeks of decline, oil trading started with a gain in October, buoyed by plans by OPEC+ to cut production by a significant amount.
Late last month, the media reported that Russia had proposed a 1 million bpd production cut. According to later reports, talks are ongoing for an even bigger production cut.
“Anything below 500,000 barrels a day would be taken out of the market. As such, we see a significant opportunity for a cut of up to 1 million barrels per day,” ANZ analysts said today, as quoted by Portal.
In fact, the reports follow an OPEC+ decision last month to cut production by 100,000 bpd in October — a move that hasn’t impacted markets, not least because of the cartel’s continued underperformance of its own production targets.
However, a cut of 1 million bpd or more is likely to impact prices, despite OPEC+ having underperformed its target by over 2 million bpd since at least June.
Oil prices, which had risen sharply since last year when oil demand recovered faster than expected from the pandemic lockdowns, lost about a quarter of their value in the third quarter.
The main reason was an increasingly gloomy outlook for the global economy as inflation continued to squeeze economies and central banks became aggressive to contain them, risking a recession.
The global inflation problem could get worse if OPEC+ cuts production significantly, the Wall Street Journal reported this weekend. The cuts would push up prices, adding to the inflationary burden and effectively increasing the risk of a recession.
At the same time, a production cut would mean more spare capacity, leading to downward pressure on longer-term prices, according to consultancy FGE.
“Should OPEC+ decide to cut production in the short term, the resulting increase in OPEC+ spare capacity will likely put more downward pressure on long-term prices,” the company said in a statement last week, as quoted by Portal.
By Irina Slav for Oilprice.com
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