Oil slumps to lowest in five months despite Opec+ production cuts

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Oil prices have fallen to their lowest level in five months as investors grow increasingly sceptical that production cuts announced by Opec+ last week will be enough to offset rising supply from countries outside the cartel and waning global demand.

Brent, the international crude oil benchmark, fell 3.7 per cent to $74.35 a barrel on Wednesday, the lowest level since early July. The US benchmark, West Texas Intermediate, dropped 4.1 per cent to $69.33 a barrel.

The declines mark a five-day losing streak for global crude prices, despite Saudi Arabia and Russia leading the Opec+ cartel last week in extending existing voluntary cuts and adding new reductions from other members in an attempt to bolster the market.

But the voluntary nature of the cuts, which are outside the group’s normal quota targets, has left many traders unconvinced.

“The market is starting to price in the possibility that Opec may no longer remain cohesive and does not implement these cuts,” said Martijn Rats, chief commodities strategist at Morgan Stanley.

Lower oil prices provide a boost for a global economy that has been hit by a slowdown in China and high interest rates in big industrial nations.

The cartel’s failure to drive the market higher is also likely to be welcomed by US President Joe Biden, who is battling low approval ratings and has made reducing gasoline prices and containing inflation a key plank of his re-election bid next year.

Large oil producers will not want to see prices fall much further. Russian President Vladimir Putin on Wednesday visited Opec member the United Arab Emirates, which has become a key conduit for Russian trade since the invasion of Ukraine.

Putin is due to travel to Saudi Arabia on Thursday, where his relationship with Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler, has been underpinned by the Opec+ alliance they formed in 2016.

Analysts said investors were left unconvinced that Opec members, some of whom feared losing market share, were united in their desire to constrain supply, and pointed out that most of the cuts were extensions of existing plans.

African members of the group including Angola have pushed back against further reductions in their output.

“When Opec cuts production in this way, they risk losing market share,” said Rats at Morgan Stanley. “A lot of Opec countries are keen to maximise their resources.”

Prices fell further on Wednesday afternoon after weekly government data showed a bigger than expected increase in US gasoline inventories, heightening concerns that demand was also relatively weak.

Bjarne Schieldrop, chief commodities analyst at SEB, said he expected more production cuts from Opec+ if prices failed to recover.

“There has been strong growth [in oil output from the US] this year — stronger than expected,” he said. “If that continues into next year, then of course it’s a challenge for Opec+. I expect more cuts to be announced.”