Oil prices end at 2-week low as OPEC+ decision disappoints

Crude prices slumped for a second day after OPEC+ producers on Thursday agreed to cut around 2.2 million barrels per day (bpd) of crude from the market in the first quarter of next year, a figure that included a widely expected extension of Saudi Arabia’s 1 mbd voluntary output cut and Russia’s 300,000 barrel a day cut to crude exports.

Oil futures fell for a second straight session on Friday to turn lower for the week, following the outcome of an eagerly awaited OPEC+ meeting that left traders unconvinced that producers will fully deliver additional production cuts.

Price action

• West Texas Intermediate crude for January delivery CL.1, -2.03% CL00, -2.03% CLF24, -2.03% declined by $1.89, or 2.5%, to settle at $74.07 a barrel on the New York Mercantile Exchange, for a nearly 2% weekly loss.
• February Brent crude BRN00, +0.38% BRNG24, +0.38%, the global benchmark, shed $1.98, or almost 2.5%, at $78.88 a barrel on ICE Futures Europe, also losing 2% for the week. Brent and WTI crude settled at their lowest since Nov. 16, according to Dow Jones Market Data.
• January gasoline RBF24, -2.20% fell 2.5% to $2.12 a gallon, losing 0.7% for the week, while January heating oil HOF24, -3.07% shed 3.4% to $2.66 a gallon, for a weekly loss of nearly 3.7%.
• Natural gas for January delivery NGF24, -0.93% settled at $2.81 per million British thermal units, up a penny, or 0.4%, for the session, but ending down 6.2% for the week.

Market drivers

“It seems traders either aren’t buying that members will be compliant or don’t view it as being sufficient,” said Craig Erlam, senior market analyst at OANDA, in market commentary. It could also be that the “lack of formal commitment hints at fractures within the alliance, which could impact its ability to hit its targets, let alone cut further if necessary.”

The additional cuts, which were left to be announced by individual members, also disappointed traders who questioned the enforcement of the reductions by smaller producers given their voluntary nature.

Check out: Why oil prices dropped despite OPEC+ pledge to make additional production cuts early next year

The announced cuts were “clearly contentious and came after much debate, which is incredibly important to note given that the cuts were purely voluntary,” Troy Vincent, senior market analyst at DTN, told MarketWatch. “This understandably casts doubt on whether the roughly 700,000 bpd of new voluntary cuts coming from Iraq, the UAE, Kuwait and others will be realized — some of whom are already overproducing.”

He also pointed out that recent events, including comments from the Saudi energy minister blaming the drop in oil prices on speculators rather than the supply and demand balance, “reveal the extreme degree of OPEC guidance and narratives diverging from reality.”

After all, if the market was well balanced as the minister claimed, there would be no need for the additional cuts that were just announced, said Vincent.

Meanwhile, OPEC+ said in its statement Thursday that the voluntary cuts would be wound down “gradually subject to market conditions,” Helima Croft, global head of commodity strategy at RBC Capital Markets, said in a note.

In the run-up to the meeting, there was speculation Saudi Arabia could phase back its 1 mbd cut in January to regain market share, Croft noted. “We see this added timing language as an attempt to squash speculation that they will flood the market with those barrels at some point in the near future.”

In other developments, Brazil said it would join OPEC+ in January. That could be an important medium-term development if the South American producer eventually agrees to collective output management, Croft said.

Brazil’s leadership has targeted 5.4 mbd of production by the end of the decade, up around 2 mbd from current levels, and is seen as one of the most significant sources of non-OPEC supply growth over the medium term, she said.