Saudi Arabia’s Crown Prince Mohammed bin Salman. As the Saudi-led OPEC+ has withdrawn supply,the vacuum it was supposed to create has been filled by the non-OPEC+ producers.

Saudi Arabia’s Crown Prince Mohammed bin Salman. As the Saudi-led OPEC+ has withdrawn supply,the vacuum it was supposed to create has been filled by the non-OPEC+ producers.Credit:AP

The heavy lifting for the production cuts is being done by Saudi Arabia (1 million barrels a day) and Russia (300,000 barrels of oil a day and 200,000 barrels a day of refined product),with the other members of the 23-strong group contributing the remaining 900,000 barrels a day.

While the earlier cuts did drive the price up to almost $US100 a barrel in late September,not even the most recent reduction in the cartel’s output has been able to keep them elevated. After slumping to as low as $US73.24 a barrel last week,they ended the week at $US76.55 a barrel.

The problem for the cartel is that,even as it has withdrawn its oil from the market,producers outside the cartel (or,in Iran’s case,exempt from the production quotas and pumping oil at its highest level for five years) have been pouring increased production into the market.

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The US domestic producers are hitting production records of about 13.3 million barrels a day,with overall production of oil and condensate of more than 20 million barrels a day. Brazil and Guyana are setting their own production records.

As OPEC+ has withdrawn supply,the vacuum it was supposed to create to produce a tighter supply-demand equation has been filled by the non-OPEC+ producers.

According to the latest International Energy Agency (IEA) oil market report,issued late last week,that has shrunk the cartel’s share of global production to 51 per cent,its lowest level since the original OPEC cartel was expanded with the inclusion of Russia and others in 2016.

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That shrinking market share creates a dilemma for OPEC+ and its Saudi leadership. They are wearing the pain of the lost volumes and revenues while others,particularly the US producers,are gaining at their expense.

Moreover,the options for responding aren’t great.

The growth in the world’s fleet of electric vehicles – and the growth in EVs in China in particular – is a growing and long-term drag on demand.

The growth in the world’s fleet of electric vehicles – and the growth in EVs in China in particular – is a growing and long-term drag on demand.Credit:Bloomberg

In 2014,in an attempt to kill off the fledgling US shale oil sector and win back the market share the US producers were taking at a time of very high oil prices,OPEC+ flooded the market and drove the price down from more than $US115 a barrel to less than $US30 a barrel.

While that did curtail,for a while,the growth in US production the shale producers responded with dramatic increases in efficiency and a tighter focus on returns on capital.

Those increases in productivity have continued – the US has about 20 per cent fewer drilling rigs today than the sector did at its peak but is producing record volumes of oil.

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Even if OPEC+ were to collapse the price again and shut down the shale sector in the US,the moment the prices climbed back those wells would be rushed back into production. The US onshore oil and gas sector is nothing if not flexible and dynamic.

For the moment,the only obvious strategy for the cartel is to sit on its collective hands,maintain its production cuts and hope that demand increases sufficiently to cause the market to tighten and drive higher prices.

The IEA,which revised down its forecast demand for the December quarter of this year by 400,000 barrels from what it had forecast only a month ago,now says world demand for 2023 is on track to rise about 2.3 million barrels a day to 101.7 million barrels a day.

Next year,however,it expects the growth in demand to be cut to 1.1 million barrels a day. It’s also forecasting another 1.2 million barrels a day of increased production from non-OPEC+ producers – new supply from outside the cartel will be greater than the modest increase in demand.

The factors that led the IEA to revise its December quarter forecasts aren’t likely to disappear quickly.

Europe,struggling with high interest rates and the impact of the war in Ukraine on its energy costs and,through them,its manufacturing sector,isn’t going to suddenly boom.

US shale oil producers are cashing in after responding to OPEC+’s reduced production by lifting their own.

US shale oil producers are cashing in after responding to OPEC+’s reduced production by lifting their own.Credit:AP

China,witha still-spluttering economy characterised by weak consumption and excess factory capacity and shockwaves still from the meltdown in its property sector,isn’t the driver of global growth that it was in pre-pandemic times.

The US economy remains quite strongbut is slowing towards a hoped-for “soft landing.”

In the meantime,the growth in the world’s fleet of electric vehicles – and the growth in EVs in China in particular – is a growing and long-term drag on demand.

The factors that led the IEA to revise its December quarter forecasts aren’t likely to disappear quickly.

For producers like the Saudis,with their ultra-expensive programs to try to diversify their economies away from the reliance on oil,the prospect of a sustained period of prices below $US80 a barrel would be discomfiting. The Saudis are thought to need prices of closer to $US100 a barrel to balance their swelling budgets.

The Russians would also be concerned. Until very recently,it had appeared that Russia had,with its “grey armada” of ageing tankers and sanction busters,circumvented the West’s efforts to squeeze its oil revenues. More than half its oil exports were occurring at prices above the G7’s $US60 a barrel cap.

Last month,however,the IEA says Russian crude export prices fell sharply and,on December 6,the price of its flagship Urals product fell below the G7 cap. Lower prices and a 200,000 barrels a day decline in shipments caused a 17 per cent fall in month-on-month export revenues.

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The OPEC+ strategy this year has proven to be counterproductive.

It has squandered market share and revenue with its production quotas,transferring revenues and influence to unaligned producers and,unless it wants to tank the oil prices for little if any long-term gain,will have no choice but to maintain its reduced production well into next year,if not beyond.

The OPEC+ producers would be very conscious that the global focus on carbon emissions reduction means there is a ticking clock for the cartel,whose members control about 80 per cent of the world’s proven oil reserves,the majority of them in the Middle East.

The longer prices remain around or below $US80 a barrel and the cartel is locked into production levels well below its members’ capacity to produce,the more of those reserves that will eventually be stranded and valueless.

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