OPEC+ first in person meeting since pre-Covid as 23 energy ministers meet in Vienna – Rystad Energy oil market note

All eyes turn to Vienna as OPEC+ meets in person today to discuss production targets.

Here is Rystad Energy Oil Market note with Senior Vice President Jorge Leon:

OPEC+ ministers are meeting on 5 October in Vienna, Austria to discuss production policy for the months ahead. While there is naturally uncertainty around what decision they will take, we believe that a decision to cut production – which is likely to fall between 500,000 barrels per day (bpd), to 2 million bpd – will be a bullish signal for oil prices.

Reduced supply in the market has obvious upward price indications.

We believe, however, that the price lift will be limited for three reasons.

Firstly, an announced cut of any volume is unlikely to be fully implemented by all countries, as the group already lags 3 million bpd behind its stated production ceiling. Secondly, we believe new output targets will mostly be shouldered by core Middle East countries, led by Saudi Arabia, the UAE and Kuwait, and thus any announced cut should be discounted heavily, as most other OPEC+ countries are struggling to meet current production quotas ceilings.

Lastly, the result of today’s meeting – which will be held as an in-person event in Vienna for the first time since the Covid-19 pandemic began – should not be too surprisingly bullish as our supply-demand balances indicate that the oil market will be oversupplied in the fourth quarter of this year, meaning there is room for OPEC+ to cut and yet not send prices too high.

Rystad Energy’s current base case -which was updated last week and assumes no further OPEC+ target cuts for the rest of the year – sees an oversupply in this year’s fourth quarter, fueled by the strongest US quarterly growth since the final quarter of 2019.

This surplus in the market adds downside pressure on prices so that, by the end of the year, Brent crude is set to fall below its current range.

We have analyzed the potential impact of OPEC+ cut based on different scenarios.

In each one, we assume that the group will announce a cut in production that will fall short, as described above.

Scenarios

In the first scenario, we assume a cut of about half a million barrels which would result in around 360,000 bpd of actual output cut. In this case, oil prices will hover close to or just above $90.

Scenario two considers a target cut of about 1 million which would result in an actual cut of between 500,000 to 600,000 bpd. In this case, prices will rise to mid-90s

In the final scenario a stronger cut of 1.5 million bpd that will reduce production by close to a million barrels per day, in this case we anticipate prices to be close to $100 per barrel.

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