OPEC and the US wrestle for control of oil prices
City PM’s energy editor Rhodri Morgan delves into the sector’s challenges in his weekly column.
The US and OPEC+ are once again locked in a battle to establish a dominant position for control over oil prices.
Oil prices have been on the slide for the past seven weeks; the longest sustained drop for around five years. From a 2023 high point of $94 a barrel at September’s end, international benchmark Brent Crude sunk to $75 per barrel on Friday.
Saudi Arabia-led OPEC is a conglomerate of oil-producing nations established in 1960 to try and collectively direct and influence the global oil market. It accounts for around 40 per cent of global crude output.
Typically, when oil prices drop too low, production cuts from OPEC boost prices back up over fears of under-supply.
The tactic has worked before and no doubt was expected to work when cuts were announced over 12 months ago.
Russia and Saudi Arabian officials have both warned the production cuts could extend past the first quarter of 2024.
OPEC is waiting for a flip – the moment the world realises it can’t do without OPEC’s oil supply, the market tightens and prices spike.
But one country is almost single-handedly preventing that from happening; the US.
The American powerhouse
In a historic run, American crude oil production reached an all-time high of 13.2m barrels a day in September, according to figures from the US Energy Information Administration.
Three years on from the oil crash of 2020, where pandemic layoffs and an oversupply of oil pulled prices into the negative for the first time on record, around one in eight barrels of global oil output is currently churning from the US.
Should OPEC decide to make a bull-rush at the US position, this could come in the form of a great market flood – a battle-proven tactic.
Back in 2014, US inventories unexpectedly hit a then-record high, demand from China had slumped and a glut of oversupply was beginning to stress prices lower.
OPEC met in November that year but the expected cuts to arrest price freefall never came, leading to an oversupply and subsequent price crash that made it unprofitable for the US to drill.
OPEC’s options
Though cheap oil hurts OPEC in the short term, bluffing on supply cuts has the potential to reset the market to its favour. The question is, can they find that point in 2023.
Greg Newman, chief executive of Onyx Capital Group, a liquidity provider in oil derivatives, told City A.M.: “That’s why OPEC is getting so frustrated because previously they’ve hit that sweet spot but it’s just getting lower and every time they’re going deeper into their pockets.”
Though Russia and the UAE have also committed to contributing towards cuts, other OPEC+ nations such as Kazakhstan, Iraq, Algeria and Oman have also committed. Brazil could also join the movement after accepting Saudi Arabia’s invitation to join the cartel next month.
The global oil demand outlook is weak for 2024. Americans casting ballots for their next president will have an eagle eye on pump prices.
If there’s a calm before a possible storm, it’s now; as OPEC watches and waits to see if it should twist the knife further to try and instigate a market reset.
On the other hand, maybe this is a new normal.
“People are going as far as to ask if full production will ever come back online,” Newman said. “When is there a good time to do that if there’s already enough oil in the world?”.