Brazil joins OPEC+, should oil prices fall next year?
Source of this article: Times Weekly Author: Liu Muxuan
At the final OPEC+ meeting of 2023, which is made up of Organization of the Petroleum Exporting Countries (OPEC) members and non-OPEC producers), a new face has emerged, attracting the attention of the global oil market.
On November 30, local time, Brazilian Energy Minister Alexandre Silveira announced that Brazil will join the organization from next year and become the 24th member of OPEC+.
Brazil is one of the world's top 10 oil producers and has been the largest oil producer in South America since 2016. According to the International Energy Agency, Brazil ranked 10th in the world in terms of oil exports in 2022, and it is also one of the few oil producers with rapid growth in production capacity. Brazil will produce an average of 3.5 million barrels per day this year and is likely to become the fifth-largest oil producer in 2023.
Brazil's Minister of Energy, Alexandre Silveira (Source: Social Media)
"This is a historic moment for Brazil and the energy sector. Silvera said.
But Brazil's participation may have been the only bright spot in the day's stalled OPEC+ meeting. After the meeting, international oil prices fell by more than 5% from their highs to $80 per barrel, and the market expressed its disappointment with the results of the meeting with actual trends.
After the meeting, OPEC+ members reached an agreement to "voluntarily" cut production by nearly 2 million b/d early next year. In other words, because it is not mandatory, Member States can withdraw from the agreement at any time. This news is a sharp reduction from the "unified 2 million b/d" market rumors before the meeting, and the crude oil market overestimated the strength of the group's production cuts.
It is worth noting that the current international oil price is similar to the last round of domestic refined oil price adjustment on November 21, and there is no significant fluctuation. The next round of adjustment is on December 5, based on the forecast data of a number of media and institutions, it is expected that in addition to most areas in Hainan and southwest China, No. 92 gasoline in other parts of the country will remain in the "7 yuan era".
At a time when global crude oil demand is weak and the Palestinian-Israeli conflict is still unending, OPEC+ seems to be a bit "unanimous".
The most special member
OPEC+'s frequent production cuts do not seem to be suitable for Brazil, which has increased production significantly in recent years to generate revenue.
OPEC+ is an organization open to all oil-producing countries, and its charter is not binding on signatory members.
Even if the member states collectively approved the production reduction plan at the meeting, there is still room for maneuver in private. For example, Iraq and Iran are often found to have actually increased production after the collective adoption of production cuts.
By the same token, if collective action by other OPEC+ members is not in Brazil's interest in the future, there is still a possibility that Brazil will not participate.
Offshore oil wells in Brazil (Source: Social Media)
Whether or not to participate in the production cuts depends on what kind of oil price Brazil is able to accept.
Although Saudi Arabia's oil production costs less than $10 per barrel, the International Monetary and Economic Organization (IMF) estimates that Saudi Arabia will need international oil prices between $80 and $88 per barrel this year to maintain its fiscal balance due to expanding investment in recent years. Once below this price, Saudi Arabia will have an incentive to cut production and raise oil prices.
As of press time, the price of cloth oil was $80.82 per barrel, and U.S. oil was at $76.05 per barrel, approaching Saudi Arabia's bottom line.
But at this price point, Brazil still has to gain. This is because Brazil needs lower oil prices to maintain fiscal balance, with the Economist study estimating that Brazil can afford lower crude oil prices than Saudi Arabia, almost at the same level as the United States, at about $65 per barrel.
Therefore, even if the international oil price is below $80 per barrel, Brazil is in no hurry to follow Saudi Arabia's pace and implement production cuts.
Even with the decision to cut production, the Brazilian government does not have as much control over domestic oil production as Saudi Arabia and Russia. In terms of implementation, it can be difficult to unify the pace.
An oil refinery under construction in Brazil (Source: Social Media)
This is because the rapid growth of Brazil's oil exports in recent years is due to the government's opening up of the oil industry. After the reform, Petrobra will put each field into a global bidding, and Pakistan is responsible for the production operation and has a certain equity, so it cannot unilaterally decide to reduce production.
For example, in 2013, Brazil launched the Ribeira subsalt block for the first time, and finally a consortium composed of Petrobras, Shell, Total, PetroChina and CNOOC won the bid, with Petrobra as the operator.
Regarding Brazil's accession to OPEC+, UBS analyst Giovanni Stanovo believes that the influence on the organization is favorable, but the impact on the oil market is small.
Is it useless to cut production?
Regardless of Brazil's future influence in OPEC+, OPEC+, which has only been established for about 7 years, is itself in the predicament of declining influence on the crude oil market. Almost every time a member country meets to reduce production, oil prices do not rise just as they say.
Facts have proved that in the face of events such as sluggish global demand, the Russia-Ukraine conflict, and the Palestinian-Israeli conflict, simply adjusting supply and demand is not enough to support oil prices. In particular, when external environmental factors also involve the interests of major member states, it is easy for member states to "go their separate ways".
For example, is Russia willing to drastically limit oil production and expand its fiscal deficit while still needing funds for the Russia-Ukraine conflict? After the Palestinian-Israeli conflict, how should Saudi Arabia, which is dissatisfied with Israel but wants to protest to the United States, choose? Should Iran and Iraq support Palestine by increasing production and generating revenue?
OPEC headquarters in Vienna, Austria (Source: Social Media)
In the eyes of many in the industry, from the very beginning, OPEC+ was a rather loose organization, a community of interests formed to defend its oil export profits.
Among the member states, Saudi Arabia and Iran are bitter rivals, South Sudan and Libya are suffering from civil wars, and other oil-producing countries such as Venezuela are mired in economic crises.
Once the external environment changes, the organization's influence on the oil market will be greatly reduced. Saudi Arabia wants to cut production to raise oil prices, while other countries want to increase production and cash in on foreign exchange from oil exports as soon as possible.
Just last week, the price of Brent crude oil, the benchmark for international oil prices, hit $77 a barrel, reaching a nearly four-month low and even lower than when the Palestinian-Israeli conflict broke out. At that time, Saudi Arabia led OPEC to cut production to support oil prices despite clear protests from the United States, which was the highlight moment of the organization's influence.
Now, OPEC+ members have announced "voluntary" production cuts in the first quarter of next year, with a total scale of 2.193 million barrels per day, of which Saudi Arabia and Russia will cut production by 1 million barrels and 500,000 barrels respectively, and the remaining share will be mainly borne by Iraq, Kuwait and other countries.
An oil refinery in Russia (Source: Social Media)
But this time, the market also does not believe that OPEC+ production cuts can bring about a significant reduction in oil supply.
Amrita Sen, director of research at energy consultancy Energy Aspects, said OPEC+'s new production cut target could actually be half. This is because some countries are already producing less oil than they claimed, such as a country that claims to cut production by 500,000 barrels per day from 1 million barrels per day, when in fact it is only 500,000 barrels per day.
The International Energy Agency (IEA) also expects global demand to rise slightly to 930,000 b/d next year, an amount that could easily be met by increased production by non-OPEC+ members, making the group's collective production cuts meaningless.
The United States, for example, can easily do this.
The United States contributed 80% of the increase in global oil supply in 2023, making it the world's largest oil producer and exporter. The rise of the United States in the oil industry has weakened OPEC+'s influence in the oil market.
(Intern Yang Xinyu also contributed to this article)