As was well-telegraphed – and despite The White House’s sabre-rattling – OPEC+ JMMC has recommended the cartel to go ahead with a historic 2 million b/d production cut.
One delegate has confirmed this cut is from baseline levels. This means the production cut is less than 2 million b/d directly since current actual production levels are already below quota. However, it is still a sizable cut.
White House Press Secretary Karine Jean-Pierre said after today’s production cuts, “OPEC+ is aligning with Russia.”
The extent to which any cut to November quotas will reduce actual supply will depend on how OPEC+ members fare in meeting their targets this month and how the cut is distributed.
If agreed by ministers at their meeting in Vienna today, it will mark the biggest cut since the group reduced its collective quota by 9.7mn b/d during the early stages of the Covid crisis in 2020.
WTI is extending gains on the news, rallying back above $87 at 7-week highs.
On the surface, the OPEC+ headline cut of 2mb/d sounds very large, but the cut is from baselines and there were no revisions to the baselines… which means that to figure out the real impact of the “gross” cut one needs to net out countries which are already producing well below their quotas.
As Goldman’s Damien Courvalin writes, given Russia is under-producing by c.1.3 mb/d versus its current quotas, it would need to be exempted for a 2mb/d cut to add up. Additionally, Russia is unlikely to allow for a quota much below its capacity. Meanwhile, the other countries in the aforementioned list have not displayed the level of capacity erosion observed in much of the rest of OPEC+.
From this alternative perspective, Goldman believes that such a baseline adjustment is worth approximately 1.5 mb/d alone (even excluding a Russia rebasement).
As such, the bank believes that the 2mb/d headline OPEC+ cut would only be implemented as an incremental 0.5 mb/d quota cut on top of such a baseline change.
Net, this only amounts to an effective cut of 400-600 mb/d versus Goldman’s expected November/Nov-22 – Dec-23 expectations from the bank’s 27-Sep-22 balances respectively. This is very similar to the 1mb/d announced quota cut scenario from the bank’s previous report.