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Commodities Corner: OPEC+ could cut oil production because it’s trying to halt a sharp crude selloff

Oil prices notched their fourth monthly loss in a row, leading to speculation that major oil producers next week will make a fresh move to set a floor under prices — cutting production for a second consecutive month.

The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, will hold their monthly meeting on Oct. 5. 

The group will have to “decide how much firepower to deploy to staunch a sum-of-all-fears macro selloff that has caused crude to slide” below pre-Russian invasion of Ukraine levels, wrote Helima Croft, head of global commodity strategy and MENA research at RBC Capital Markets, in a Wednesday note.

At a previous OPEC+ meeting on Sept. 5, members essentially agreed to reverse a 100,000 barrel-per-day oil production increase for September, cutting output for October by that same amount.

“The shift from hiking production to announcing cuts reflected the deterioration of oil prices over the summer,” said Stacey Morris, head of energy research at investment research provider VettaFi. The cut for October “demonstrated that OPEC+ is willing to intervene if prices seem to overcorrect or markets seem distorted.”

Weakness in prices made it important for OPEC+ to “set a floor under prices and send a message by cutting,” Morris told MarketWatch.

Oil prices ended September with a loss — their fourth monthly decline in a row. On Friday, U.S. benchmark West Texas Intermediate crude
CLX22,
-1.74%

CL.1,
-1.74%

settled at $79.49 a barrel on the New York Mercantile Exchange, with front-month prices down more than 11% for the month, according to Dow Jones Market Data. November Brent crude
BRNX22,
-0.67%

BRN00,
+0.35%

ended Friday at $87.96 a barrel on ICE Futures Europe, down 8.8% month to date.

For the third quarter, WTI was down nearly 25%, while Brent lost more than 23%.

OPEC+ has been responding to the “dynamic outlook of potentially slowing demand, seasonal factors, and also potential supply disruptions with the looming ban on Russian volumes in Europe” by the end of this year, said Peter McNally, global sector lead for industrials materials and energy at Third Bridge.

Experts at Third Bridge believe $90 a barrel for Brent is “give or take” where OPEC+ would like prices to be, and they see “potential for further, relatively small cuts in [oil] production at the upcoming meetings for OPEC+,” he told MarketWatch.

A decision to cut, however, has to be “balanced” with the potential disruption in supplies from Russia, and the European Union ban on Russian oil in December, said McNally.

Still the stakes are “relatively low” at the meeting next week, at least until the situation in Europe becomes more clear, he said. “The potential for physical disruption of oil flows out of Russia is elevated, and it is unlikely that OPEC+ makes a major policy shift until that situation is resolved.”

Tensions surrounding Russia’s war in Ukraine climbed this week following damage to the Nord Stream 1 and 2 pipelines, built to carry Russian natural gas to Europe. The cause of the damage is unclear, but a statement from the North Atlantic Treaty Organization said all “currently available information” points to “deliberate, reckless, and irresponsible acts of sabotage.”

Read: Nord Stream pipeline leaks remind Europe it can’t rely on natural gas from Russia

If the oil market stabilizes, OPEC+ may be able to “maintain status quo,” with no changes to output for November and December, said VettaFi’s Morris.

Aside from “absolute price levels,” however, demand expectations are likely central to the group’s decision, she said. The key variables for demand are “the health of the global economy and demand trends in China,” and demand concerns could justify announcing another modest cut.”

A small cut would likely be supportive for oil prices, “even if largely symbolic,” said Morris.

OPEC+ members have discussed a potential production cut ahead of a meeting next week, Reuters reported Thursday, citing three sources. The report said Russia could suggest a cut of up to 1 million barrels a day.

Still, the CME Group OPEC Watch Tool on Friday afternoon shows a 79% probability for no change or a small output increase, and a 10.5% chance for an output decrease, at the Oct. 5 meeting.

Volatility is likely to continue for oil prices, said Morris. 

Read: Oil’s crazy price moves aren’t really crazy at all

“From a demand perspective, a lot depends on China reopening and how that may help a slowing global economy. If demand deteriorates, that puts more slack in the system and loosens the supply-demand balance,” Morris said.

From a supply perspective, key focus items include the end of previously announced releases of oil from the U.S. Strategic Petroleum Reserve and what happens with Russian oil supplies as the EU embargo takes hold, she said.

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