Oil prices were expected to trend downward as Saudi Arabia decided it will give up on the production cuts it started about two years ago and focus on maintaining its market share.
Shortly after Saudi producers announced they would not try to keep Brent crude prices above $100 per barrel, the OPEC+ group agreed at its Oct. 2 meeting to stick with its target of allowing oil production to increase in December.
While the potential for a wider Mideast war has some speculating oil prices could rise, that concern did not seem to have a lasting impact, Oilprice.com reported.
The Saudis have been ceding their market share by taking on the majority of the OPEC production cuts—reducing their country’s output by about 2 million barrels per day since late 2022 according to Reuters.
Currently, OPEC+ produces 48% of the world oil supply, with 10% of that coming from Saudi Arabia, Reuters reported. Meanwhile the U.S. has increased its production to the point where it provides 20% of the world supply.
Saudi Arabia can use production increases to recapture some of their market position, including from OPEC+ members who have continued big production.
Saudi officials claimed OPEC+ members Iraq and Kazakhstan, have not been keeping to their production limits the Financial Times reported, and a recent Reuters poll showed that, while OPEC output was at a yearly low in September, Iraq was still producing above its quota.
Challenge of limiting production
Experts expressed doubts that OPEC+ could have maintained lower production, even if all members adhered to their quotas.
“If they manage to get this cheating under control, there’s a small chance this won’t impact prices too much. But that’s a big if,” Ole Hansen, head of commodity strategy at Saxo Bank told the Wall Street Journal. “This is based on the assumption that the countries that are overproducing would cut back and I’m still skeptical.”
Many have speculated that the price of oil will peak in 2029, or sooner, as China’s population growth slows and the country’s demand decreases due to a transition to electric vehicles. In the last four months, China’s oil demand has contracted, and in July alone, consumption contracted by 280,000 barrels a day.
The one unknown factor is the possibility of greater war in the Mideast, which could limit production, lead to destruction of oil infrastructure, and interfere with shipping, driving up oil prices. For now news about potential cease fire or escalation can be expected to drive short term fluctuations in prices, experts told Reuters.
“We continue to be very headline dependent,” said John Kilduff, partner with Again Capital LLC.
“There should be a lot of volatility up and down on this conflict,” Phil Flynn, senior analyst at Price Futures Group added.
