(News Bulletin 247) – Black gold prices fell on Tuesday as the expanded cartel announced additional production cuts of 900,000 barrels per day. But in reality it is a kind of promise based on voluntary participation, which has disappointed the market.

Sometimes the devil is in the details (or lack thereof). On Thursday, oil ended very sharply lower. The February North Sea Brent contract and the January New York-listed WTI contract both lost 2.4%. This Friday, the two contracts changed little, nibbling 0.2% and 0.05% respectively.

This downward movement is paradoxical in that it occurred at the end of a day when the members of OPEC+, that is to say the states affiliated to the Organization of the Petroleum Exporting Countries (OPEC ) and their allies, announced production cuts totaling 2.2 million barrels per day. And yet the market hardly appreciated: Deutsche Bank notes that the price of black gold even lost up to 5% during the day.

Several reasons explain this decline. First of all, it should be noted that the market had widely anticipated production cuts from the expanded cartel, with oil gaining more than 2% on Wednesday. From then on, investors were prepared to punish the slightest disappointment in the outcome of the OPEC+ meeting.

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Volunteering that worries

The real point that disappointed the market lies in the very nature of the production cuts that the cartel will make. OPEC+ will reduce its production by 2.2 million barrels per day, a figure which includes additional reductions of 900,000 barrels per day which are added to the 1.3 million barrels per day less already recorded (and therefore extended) by Saudi Arabia and Russia.

Problem: these additional cuts of 900,000 barrels per day are purely voluntary and therefore the goodwill of each country, the members of OPEC+ not having reached a formal and binding agreement.

“The decision took the form of ‘voluntary reductions’ on the part of several OPEC+ countries rather than a more traditional agreement on the reduction of production quotas, which leaves doubts about the degree of rigor of the implementation of supply reductions”, underlines Deutsche Bank.

“First, the additional production reduction is only a temporary response to recent surprises linked to the increase in inventories (and therefore the fall in supply, Editor’s note),” explains Stephen Innes of Spi Asset Management. Second, the increase in unmobilized capacity and “the voluntary nature of today’s reduction (Thursday, Editor’s note) means that additional reductions become increasingly difficult to implement due to the fragile nature of compliance of OPEC+ rules while American production reaches record levels”, he explains.

As Bloomberg reports, the United States announced Thursday that its crude production had reached a record of 13.2 million barrels per day in September. This leads investors to fear that the less disciplined members of OPEC+ will not wish to reduce their own production so as not to see their market share crumble.