Oil prices slump more than 2% to post sixth straight weekly decline despite Opec+ cuts

Extension of voluntary oil output cuts fell short of market expectations, analysts say

Oil prices are still being weighed down by concerns of slow demand growth in China and the US, the world's biggest consumers of crude. Reuters

Oil prices fell by more than 2 per cent on Friday and posted a sixth consecutive decline amid uncertainty over future demand despite Opec+ members extending their voluntary oil output reduction.

Brent, the benchmark for two thirds of the world’s oil, shed 2.45 per cent to settle at $78.88 a barrel. West Texas Intermediate, the gauge that tracks US crude, slipped 2.49 per cent to finish at $74.07 a barrel.

Opec+ members on Thursday extended their voluntary oil output reductions until the end of the first quarter of 2024 amid concerns over future fuel demand.

Saudi Arabia, the world's largest oil exporter, will keep its voluntary output cut of one million barrels per day until the end of March. The UAE and Russia will also deepen their crude production cuts.

In total, the group revealed supply reductions of almost 2.2 million bpd for the first quarter.

However, with oil prices reversing initial gains and declining after the announcement on Thursday, analysts suggest the market was “disappointed” by the decision, as it fell short of expectations.

“The new cuts are only for the first quarter of 2024 and, more importantly, the group failed to agree on an Opec+ wide cut and instead had to rely on voluntary unilateral cuts,” said Jorge Leon, senior vice president at Rystad Energy.

The reaction of prices on Thursday was like “sitting on a roller coaster”, said Giovanni Staunovo, a strategist at Swiss bank UBS.

“While we believe Opec+ wants to stay in control of the oil market by taking a proactive approach to prevent oil inventories from rising in the first quarter of 2024 when oil demand normally seasonally weakens, the way those production cuts has been announced has created confusion,” he said.

“As those are voluntary cuts, market participants seem to be concerned that a large fraction of those new pledged cuts won't get implemented. Also, part of the current Opec+ production cuts are voluntary, so we should still lower Opec+ crude production in the first quarter.”

Oil prices, which briefly touched $98 in September, have since fallen by around 16 per cent, despite predictions of a tight crude market in the fourth quarter by the International Energy Agency and Opec.

Crude jumped at the start of the Israel-Gaza war in October on concerns that it would escalate into a broader conflict in the region, which is responsible for about a third of the world's oil production.

However, supply concerns have eased, in part due to higher oil production in Iran and the easing of sanctions on Venezuela.

Prices are also still being weighed down by concerns of slow demand growth in the US and China, the world's biggest consumers of crude, which are respectively dealing with prospects of interest rates remaining higher for longer and a troubled property sector, said Ann-Louise Hittle, vice president for macro oils at research firm Wood Mackenzie.

“Sentiment is jittery about the prospects of economic growth and strong oil demand growth next year,” she said.

The US Federal Reserve will proceed carefully and only raise interest rates if progress in controlling inflation is hampered, the minutes of the central bank's latest meeting showed last week.

China's real estate industry, meanwhile, has been sluggish amid the bankruptcy of property company Evergrande Group and contagion concerns.

The first quarter of 2024 could also pose a challenge for Opec+ as, seasonally, global supply growth moderately outpaces demand, and inventories build at a typical seasonal pace, Ms Hittle said.

“The additional voluntary production cuts reflect that concern about the market balance … with demand uncertainty, the task for Opec+ to maintain a market balance will not be straightforward,” she said.

World oil demand will rise by 2.25 million barrels per day in 2024, compared with a growth of 2.44 million bpd this year, Opec said in its monthly oil market report.

“We continue to believe that the undersupplied oil market should see prices rising over the coming months,” Mr Staunovo said.