OPEC+ has decided to cut production quotas by 2 million barrels a day which is the equivalent of 2% of total world oil production based on the large decrease in demand from China and other parts of the world. The world is awash with oil which pushed WTI prices below $80 per barrel despite the disruptions from the Ukraine-Russia conflict. Since all the quotas for members have not been used, the actual impact may be closer to 600,000 bpd.
China is expected to see a decrease in demand for oil for the first time since 1990 and be down about 420,000 bpd as reported by the IEA in September. Overall global demand for gasoline has been slow to rebound as users have learned to be more conservative in their use. The US has decided to extend the release of 10 million more barrels from its SPR through November to stabilize prices. This a game that cannot be one if OPEC+ decides to further cut production.
The US fracking revolution changed oil dynamics and took pricing power away from OPEC, but the policies of renewables switched the emphasis away from oil production to other energy sources albeit less reliable than oil and natural gas. The dynamics of the shift in the balance were not immediately evident given the pandemic and the Ukraine-Russia war, but now oil economics are becoming clearer. OPEC+ can cut production to help tighten the oil market and raise prices and the rest of the world does not have the power offset cartel behavior. Hence, prices will stabilize for now at a higher price and be more likely rangebound instead of heading lower. A deeper recession can change these dynamics, but that is a demand issue and not a supply response.
The West may want to be less oil dependent and less natural gas dependent, but the transition matter. The switch can be a good goal, but the logistics are what matters if you want to minimize the disruption on energy users. Goals must face the reality of markets.
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