Oil prices dropped by more than 2 per cent on investor skepticism over the effectiveness of the OPEC+ production cuts and concern over a slowdown in the global manufacturing sector. While OPEC+ agreed to cut production by two million barrels per day, investors remain unconvinced that this will be sufficient to boost oil prices, which have been under pressure from weak demand.
The Brent crude futures for February delivery settled down $1.98, or 2.45 per cent, at $78.88 a barrel, while U.S. West Texas Intermediate crude futures for delivery in February dipped $1.89, or 2.49 per cent, to close at $74.07 per barrel. For the week, both Brent and WTI crude prices dropped, with Brent posting a decline of about 2.1 per cent and WTI slipping more than 1.9 per cent.
The agreement by OPEC+ producers to remove around 2.2 million barrels per day (bpd) of oil from the global market in the first quarter of next year did not have the expected impact on prices, leading some traders to express skepticism about the impact of the cuts. The cuts were viewed as insufficient to address the weakness in the oil market, with Saudi Arabia and Russia’s voluntary cuts seen as insufficient to drive a price recovery. The poor compliance record of some OPEC+ members also cast doubt on the effectiveness of the cuts, according to Craig Erlam, an analyst at OANDA.
The OPEC+ production cuts are a response to falling oil prices, which have dropped from around $98 per barrel in late September to current levels, due to concerns about a slowdown in economic growth and its impact on demand for fuel. However, these cuts are unlikely to resolve the market’s uncertainty about future demand, and only time will tell if they have any impact. Analyst John Evans of PVM notes that the reporting data on compliance with the cuts may not be accurate, which could further muddy the waters for the oil market.
The cuts agreed to by OPEC+ members recently are voluntary rather than binding, which raises questions about the true impact of the cuts. Without a revision of the collective production targets for the group, it is difficult to assess the actual reduction in output. In addition, without a clear baseline from which to measure the cuts, it is unclear how much production will be reduced in practice. This uncertainty is adding to the confusion and concern about the effectiveness of the cuts.
During his speech at the COP28 summit in the United Arab Emirates,Antonio Guterres, U.N. secretary general made a bold call for a future without any fossil fuel burning at all. This is a dramatic shift from previous goals of merely reducing emissions, and reflects the urgency of addressing climate change. The UAE has traditionally been a major oil producer, but has been making efforts to diversify its economy and reduce its reliance on fossil fuels.