Oil price slump piles pressure on Saudi Arabia at OPEC meeting

Saudi Arabia will find its de-facto leadership of OPEC tested when the group and its allies meet in Vienna on Nov. 26 against a grumbling backdrop of plunging oil prices and unheeded calls by Iran for Muslim nations to impose an oil embargo on Israel.

In a year-long and ultimately forlorn battle to prop-up the market, the kingdom has been holding back its production at 9 million b/d. Excluding the COVID pandemic and the September 2019 attack on the Abqaiq crude processing facility, the figure marks Saudi's lowest output since April 2011, according to the Platts OPEC+ survey by S&P Global Commodity Insights.

Riyadh is already feeling the pinch economically from the market's failure to respond to these cuts but is likely to meet resistance persuading other producers to jump on board further action to support prices into 2024.

Fears of slow global economic growth, particularly in China, and robust non-OPEC oil supply have turned market sentiment bearish despite relatively strong fundamentals. Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $83.33/b on Nov. 20 - down from $98/b on Sept. 27, when voluntary cuts implemented in the summer were boosting prices.

"Ongoing OPEC+ supply restraint will remain key to maintaining oil prices going forward," wrote Jim Burkhard, Vice President and Head of Research for Oil Markets, Energy and Mobility, S&P Global Commodity Insights prior to the meeting.

"It is the reason why OPEC+, and particularly Saudi Arabia and Russia, are expected to produce less oil in 2024 than in 2023 -- and that trend could continue into 2025."

With the group already underproducing its quotas and losing market share to rivals in the US, Canada and Brazil, further restraint will be a hard strategy for Saudi Arabia's Energy minister Prince Abdulaziz bin Salman to sell in Vienna.

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Bearish positions

Including voluntary cuts, the group is under producing its quotas to the tune of 827,000 b/d. OPEC+ crude production totaled 42.71 million b/d in October, according to the latest Platts survey.

In Vienna, ministers face three potential decisions. Firstly, they will have to assess the main declaration of cooperation, which includes all members. Current quotas under this framework are in place until the end of 2023, and revised levels have been agreed for 2024.

The revisions include changes to quotas for most sub-Saharan African producers, which have consistently produced under their allocations. This list includes Nigeria, Angola, Equatorial Guinea, the Republic of Congo and Sudan.

Meanwhile the UAE, with its considerable spare production capacity, is about to see its quota grow from the current level of 2.88 million b/d, to 3.219 million b/d for 2024. This could require other countries to cut their quotas if OPEC+ is to successfully support prices.

The second round of cuts are voluntary. Introduced by some OPEC+ countries, including Saudi Arabia and Russia, in Spring 2023, the cuts total 1.66 million b/d, and are currently in place until the end of 2024.

Finally, Saudi Arabia and Russia are implementing further voluntary cuts, which are reviewed monthly and are currently in place until the end of 2023.

This includes a 1 million b/d Saudi production cut, and a 300,000 b/d Russian export cut, which Russian officials have recently said includes oil products as well as crude.

"The group will at least consider a further tightening of supply because of recent headwinds -- inventories did not draw as much as expected in the third quarter, crude time spreads have unwound and paper traders are rebuilding bearish positions," Clay Seigle, director, global oil service at Rapidan Energy Group, said.

The IEA estimated that OECD commercial oil inventories were up by 1.8 million barrels in September to 2.831 billion barrels, the highest level since July 2021.

Russia, the largest non-OPEC producer in the group, will also play a pivotal role in the group's ability to support oil prices. Although the initiator of voluntary cuts, Russia has already wound back some of its latest supply cut, and its crude output was up by 20,000 b/d in October on month to 9.45 million b/d.

Whatever decisions are taken in Vienna this week, market and geopolitical uncertainty are set to challenge OPEC+ quota decisions into 2024, raising the prospect of policy changes and emergency meetings for the foreseeable future.