Crude oil prices pushed lower on December 1 after the Organization of Petroleum Exporting Countries and their allies (OPEC+) voluntarily agreed on a fresh production cut of nearly 1 million barrel a day by early 2024. The move failed to enthuse traders and, instead, drew scepticism on the group's ability to achieve supply cuts target.
The benchmark Brent crude, which had initially rallied on the news, skidded to $82.83 a barrel, down 0.32 percent, on December 1, while West Texas Intermediate (WTI) slipped 0.26 percent.
Traders remain unconvinced about the implementation of the supply cuts as the OPEC cartel, that consists of the world's major oil-exporting nations, announced additional 'voluntary cuts' starting January 1 until the end of March 2024. The cuts were announced by each member country and not the group as a whole, drawing uncertainty on the group's ability to maintain the cuts.
OPEC officials said additional voluntary cuts, designed to take the total reduction above 2.2 million barrels a day (bpd) or about 2 percent of the world supply, would be announced by individual members in due course rather than the secretariat, Financial Times reported.
Saudi Arabia will extend the voluntary cut of 1 million bpd it has had in place since July. Russia said it would deepen its existing voluntary supply cuts to 500,000 bpd from 300,000 bpd. Both the OPEC members had already pledged output cuts earlier this year, as concerns loom over subdued demand from China, the world’s largest energy consumer.
"Global oil demand growth continues to remain strong defying challenges from high interest rates, stubborn inflation, slow economic growth and geo-political tensions. This growth is driven by demand normalization and China’s re-opening," said to Pulkit Agarwal, head of India content at S&P Global Commodity Insights.
Agarwal further flagged that S&P Insight's supply-demand balances show a situation of oversupply and hence stock builds in the first half of 2024, with some deficit seen only by Q3 2024.
Last week, the International Energy Agency (IEA) also flagged a surplus in supply in 2024. The global oil market will see a slight surplus of supply next year, even if OPEC+ nations extend their cuts into next year, the head of the IEA’s oil markets and industry division told Reuters on November 21.
Meanwhile, in a surprise move, Brazil will join the OPEC+ alliance from January 2024. The country produces around 3.2 million bpd of crude and is a major supplier to China, according to S&P Global data.
"The addition of Brazil to the 10 existing OPEC+ allies led by Russia is a major coup for the cartel, which has struggled to reach consensus on cuts to arrest weak oil prices," S&P said in a report.
Impact on India
The planned cuts, if implemented successfully, would send oil prices higher, worsening the inflationary pressures in the country that had eased slightly in October. In October, retail inflation eased to a four-month low of 4.87%, edging closer to the Reserve Bank of India's target of 4%.
India is the third-largest consumer of oil and majorly relies on imports for its oil needs. The fuel prices of the country is thus linked to the international oil prices.
Meanwhile, media reported that state-owned fuel marketing companies are likely to revert to daily revision in prices of petrol and diesel only when international oil prices stabilize below $80 per barrel on a sustained basis. The companies froze the petrol and diesel prices for a record 20th month in a row.
Any spike in oil prices could potentially erode profits of the state-run oil marketing companies that had been recouping losses they incurred for holding rate when crude oil prices shot through the roof last year.
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