OPEC+ oil output cuts of 2.2 million barrels per day (bpd) in the first quarter may not be long enough, analysts and traders said, as crude oil physical and futures prices show increasing signs of surplus ahead of their implementation.
The Nov. 30 deal by the Organization of the Petroleum Exporting Countries and allies such as Russia – includes Saudi Arabia and Russia rolling over current cuts of 1.3 million bpd and nearly 1 million bpd in new voluntary reductions by others.
Despite the planned cuts, however, Brent crude futures hit a six-month low just below $74 a barrel on Thursday.
While Saudi Arabia and Russia have said the cuts could be extended if needed, analysts and traders were surprised by the brief three-month duration of the new agreement.
That was shorter than other recent deals by OPEC+ – for example a deal in June limited output until end-2024, or a round of voluntary cuts in April that was initially planned for the rest of 2023.
“I don’t think a three-month cut is long enough to make a meaningful difference in terms of physical supply even if everyone stuck to it,” Adi Imsirovic, a veteran crude trader and director of Surrey Clean Energy, told Reuters.
The short duration, plus the time lag of one to two months that it takes for producers to implement cuts, mean investors may see little evidence of reduced supply in physical markets until near the end of January.
Various analysts, consultants and specialist media assess OPEC+ supply, and extensive data indicating how much producers have cut output is not available until the end of any given month. OPEC publishes monthly production figures over a week after the month has ended.
By late January, the nearby Brent futures contract will be for March delivery and the market will be close to trading April contracts – which will be pricing in the expiry of the voluntary cut.
“Unfortunately, we won’t have an idea of January output until the end of that month, and this is a long time in the oil market,” said Callum Macpherson, head of commodities at Investec.
“The cuts are only scheduled to last for three months and it can take up to one or two months for cuts to be implemented.”
Analysts at Macquarie said the cuts may need to be extended.
“A continuation of these cuts into the second or third quarters might be required for the (Nov. 30) meeting to be viewed bullishly,” Macquarie analysts said. “From that perspective, the meeting could be seen as falling short.”
While data compilers may not have evidence of tighter supplies until the end of January, physical markets would show signs of tightening earlier.
In the North Sea market, the differential for U.S. WTI delivered to Europe, usually the crude that sets the value of dated Brent, weakened to a premium of 90 cents on Dec. 1 from over $2 in mid-November, although it had recovered to dated plus $1.25 as of Friday, LSEG data showed.
The West African crude market – which traders say is often the first to reflect a shift in wider market sentiment – has weakened. Bonny Light crude has slipped to parity with dated Brent from a $1.75 premium on Nov. 22, LSEG data showed.
That market, however, may not be the clearest indicator on the latest cuts as the two biggest West African producers, Nigeria and Angola, did not sign up to any OPEC+ cuts.
Nigeria actually secured an increase in its OPEC+ output target and Angola said it would not stick to the reduced target it was given following a review.
Middle Eastern benchmarks have tumbled. Spot premiums for medium sour Oman crude and light sour Murban crude have averaged around $0.50 to $0.60 a barrel over Dubai quotes this month, their lowest levels in almost three years.
The U.S. spot crude markets have shown a broadly tepid reaction to the planned OPEC+ output cuts.
Mars Sour, a key U.S. sour grade, last traded at a 65-cent-per-barrel premium to U.S. crude futures, down from a 90-cent premium just before the cuts. WTI Midland, a light sweet crude, last traded at a $1.20 per barrel premium, down from a $1.35 premium before the news.
The structure of the futures market signals oversupply. The nearby contract for Brent futures began trading last week at a discount to prices in a half year for the first time since June, a signal that traders believe the market may have become oversupplied and one that eventually will encourage storing oil to sell at higher prices later.
The structure of U.S. WTI crude futures also shifted last week into the same pattern, known as contango.
“There is an abundance of oil available, which is neatly reflected in the contangoed structure of the two pivotal crude oil benchmarks,” said Tamas Varga of oil broker PVM.
Besides the brief duration of the cuts, concern persists over compliance. While top exporter Saudi Arabia typically implements its share of cuts in full, there is concern other producers such as Iraq, the United Arab Emirates and Russia may not.
Iraq and the UAE produced above their quota in November according to a survey from Platts, one of the secondary sources OPEC+ uses to monitor its output.
Tracking Russia’s proposed export cut will also be challenging, sources have told Reuters, although Russia has pledged to disclose more data about the volume of its fuel refining and exports after OPEC+ asked for more transparency on shipments.