In practice, renewed cuts could be difficult to implement for OPEC+, Trend reports with reference to Fitch Solutions.
“Sanctions on Russia are anyway reducing its output, while other countries – notably Angola and Nigeria – are currently producing far below their quotas, due to structural declines in their upstream sectors. However, the group has found ways of navigating issues of this kind in the past, sweetening the terms on offer to bring dissenters on board. Critically, our Country Risk analysts believe that the key Middle Eastern producers have a strong incentive to maintain Brent in the range of USD80-90/bbl or higher, to build up their fiscal buffers and support growth in both the oil and non-oil sectors of their economies. Based on our current oil price outlook, there may be no need to implement any future cuts. But, should prices decline further, the ‘OPEC put’ appears to be firmly in play,” reads the latest report from Fitch Solutions.
The company notes that a breakdown in OPEC+ cohesion would also negatively impact prices through both a physical loosening of the market and a sharp deterioration in sentiment.
“Market participants have grown accustomed to the ‘OPEC put’ and a loss of faith in the group would likely lead to a rapid liquidation of longs and a spike in shorts, which could in turn topple prices. For the reasons discussed above, such a breakdown is unlikely. However, the group has experienced a number of tensions over recent years and underperformance by Angola and Nigeria, sanctions in place on Russia and the likely return of sanctioned barrels from Iran all pose potential barriers to future action by OPEC+. The group has also benefited from production restraint by US shale producers, which has allowed them to constrain their output without ceding ground in the export market.”
Analysts from Fitch Solutions believe that a shift in strategy in the shale patch could change the calculus for OPEC.
“Even assuming cohesion were to break down, we would not expect members to maximise their output as they did during the brief price war in 2020. But supply would nevertheless have substantial scope to grow and sentiment would undoubtedly sour.”