The cuts are for real and are already bullishly impacting the market

Thumbs down was first reaction by financial market. The market gave the decision from the latest OPEC+ meeting an unexpectedly bearish reception. Yes, it was an unusual type of decision as well as the form of the communication. It was individual, ’voluntary’ cuts rather than a wide OPEC+ based decision with cuts divided pro-rate across the group. The communication of these cuts were not done by the OPEC secretariat as is usual but rather by the individual energy ministers who committed to cuts. All this gave the decision an airy feel with the sense that ’voluntary’ meant kind of ’maybe’ instead of real commitments. Further that the group is no longer tied properly together with no solid unanimous decision. It all summed up to ’thumbs down’ by the financial market and the price fell.

Bjarne Schieldrop, Chief analyst commodities, SEB

The cuts are real and ’voluntary’ doesn’t mean ’maybe’. These ’voluntary’ committed cuts are no less firm commitments and no less real than the current voluntary cut by Saudi Arabia which continues to hold its production at 9.0 m b/d vs a normal 10 m b/d. These are real cuts: Russia -200 k b/d, Iraq: 223 k b/d, UAE 163 k b/d, Kuwait 135 k b/d, Kazakhstan 82 k b/d, Algeria 51 k b/d and Oman 42 k b/d. Total 896 k b/d. Compliance is of course always an issue. But broadly we expect these cuts to be delivered.

US oil inventories may continue to show marginal, bearish tendencies in December. These cuts will kick in from January 2024 and as such they will not impact oil inventories before then. So weekly US oil inventory data can continue to deliver marginally bearish data points through December along a trend for a while now where we have seen that total commercial crude and product stocks inches closer and closer towards the 2015-19 seasonal average.

The new cuts by OPEC+ is already physically impacting the market with tighter availability of crude cargoes for January programs. But that doesn’t mean that the new committed cuts by OPEC+ from January 2024 isn’t already impacting the physical oil market and oil prices. They are. Sales of physical oil cargoes by OPEC+ for January crude shipment programs are already in full swing. Refineries around the world are already now in the process of purchasing physical crude cargoes for Q1-24. Offerings of crude cargoes for Q1-24 by OPEC+ were immediately reduced the moment OPEC+ decided to reduce supply by 900 k b/d from January onward. Forward physical crude buyers are thus already experiencing a tighter supply in their forward purchases. And as such oil prices are already impacted.

Cuts are a backstop against deteriorating crude prices sub-USD 80/b and not a recipe for USD 100/b. The fresh 900 k b/d cut is not a recipe to drive the oil price to USD 100/b. In our eyes it is more of an effort to prevent the oil price from deteriorating further below USD 80/b. It is a backstop. And as such we think it is probably a sufficient backstop.

The bottoming of the global manufacturing cycle will be the ’big, fat cigar’ for OPEC+. It is pointless for OPEC+ to try to drive the oil price to USD 100/b without a solid tailwind from an accelerating global economy. Their best option is to try to stabilize the oil price around USD 80/b and then savor the joyride once the global economic cycle bottoms out and starts to accelerate. Long positions in oil will then rise rapidly and physical demand (oil demand growth) will accelerate. Both underpinning oil prices. OPEC+ can then lean back and smoke a big, fat cigar! The big, big question is of course when that will happen? Will we first have an ugly, economic setback in 2024/25 due to the strong rise in interest rates over the past 1-2 years? Or will inflation evaporate completely over the coming quarters because it is a complete creation of the exceptional Covid-19 events which are now reversing back towards normal? Financial markets are struggling to decide which one of these it will be. Ugly trough before global acceleration of global acceleration right away if inflation evaporates completely?

A macro economist I worked with during the global financial crises argued strongly then that the first sign of bottoming and acceleration would be found by looking at the manufacturing PMI of South Korea since they produce a swath of industrial sub-components which the global industrial engine needs. Much has changed since 2008/09 and true or false I don’t know as I’m not a macro economist. But here it is:

Manufacturing PMIs. South Korea has bottomed and lifted to the 50-line

Source: SEB graph, Data from Blbrg

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