A slow-moving market on Monday and Tuesday burst into life for the balance of the week as OPEC+ announced a cut in crude oil production of not 500,000 barrels per day, not 1,000,000 barrels per day but an astonishing 2,000,000 barrels per day leaving ICE Brent to close on Friday evening almost $11 a barrel higher and ICE gas oil $142.00 a metric tonne higher. Add to the mix the ongoing French refinery workers’ strikes (which is really strangling diesel supply in Europe), and a mysterious explosion the day after Vladamir Putin’s 70th birthday on the 19-kilometre-long Kerch Strait bridge (built by the Kremlin in 2016) between Crimea and the Russian mainland slowing a vital supply line to Russian forces fighting in Ukraine and we had all the ingredients for another volatile week full of surprises.
Without a doubt, the key turning point for this week’s market was the decision by OPEC+ to cut crude oil production by 2 million barrels, this decision wrongfooted most investors and snubbed Joe Biden and the US administration in a way that will surely have consequences for those two countries diplomatic and trade relationships.
However, despite the apparent severity of the production cut, closer examination gives us a different perspective on what exactly opec+ have done because analysis suggests that the actual production cut will be nothing like 2 million barrels per day. Whilst the group comprises 23 countries the burden of the cuts will be carried by just 3 alliance members: Saudi Arabia, the United Arab Emirates and Kuwait. Many of the others (notably Nigeria, Angola and Malaysia… Kazakhstan too are 560,000 bbls per day below allocation but this is due to planned maintenance on one of their biggest fields and a gas leak on another) are falling below their production quotas and their new target figures won’t change the reality of what they can physically produce now, so for many all that’s happened is OPEC+ have moved the internal goal posts to arrive at the 2 million cut!
Prior to this week Industry and economist estimates indicated the alliance’s actual production levels are lagging allocations by 3.6 million barrels, so 2 million is effectively cutting into that figure. Therefore when the new allocations come into play on November 1st only 8 producers will actually have to physically cut production to play their part in the mythical 2 million barrel cut (given they are already meeting their targets) ….Saudi, UAE, Kuwait, South Sudan, Algeria, Gabon, Iraq and Oman…..in total around 890,000 barrels per day…..realistically speaking we can ignore South Sudan, Gabon and probably Iraq, whilst the change for Algeria and Oman total just 33,000 barrels per day. That means actual cuts by Saudi et al will be something around 850,000 barrels per day, a tad different to the announced 2 million! However, playing with numbers is one thing, the reality is the market took it at face value and Saudi et al got a nice $11/barrel boost in the value of their crude oil cargoes!
As previously mentioned, America took umbrage at the massive cut and effectively claimed Saudi has sided with Russia by doing what they’ve done and wrecked the US/Saudi relationship although it was quite wrecked already over the Khashoggi incident. Saudi’s response was their actions weren’t political and it isn’t their job to support the American economy or Joe Biden’s mid-term election tangle, they are merely looking after their own economy.
It is very easy to be blindsided in this market by traditional “annoyances” and the uncertainty inbuilt into opec+ games is one of them, however, whilst there may be a shift in crude supply in the coming months, the products markets are facing some serious prompt supply hurdles, especially in the diesel market.
The backwardation in ICE low sulphur gas oil futures tells its own story given front month futures are $103.00 per metric tonne higher in October than in November (reflecting prompt supply tightness ) and November is $66.00 per metric tonne higher than December.
Europe will stop importing Russian diesel in February 2023, French refinery strikes are forcing Europe to deplete its current diesel stocks and heading into winter this is fast approaching a crisis ….. refiners though are reaping rewards as they are currently profiting by as much as $70 per barrel for every barrel of diesel fuel they manufacture.
In summary whilst OPEC+ is in the market spotlight today, the real problems of product shortages especially diesel are waiting in the wings to take that spotlight away from OPEC’s arrogant soft shoe shuffle.