WASHINGTON (DTN) -- West Texas Intermediate and Brent crude futures flipped between modest gains and losses early Wednesday as investors parsed through reports suggesting Saudi Arabia and Russia are set to approve deep production cuts when OPEC+ meets in Vienna on Wednesday morning to decide on nominal output targets for November, defying calls from the United States, European Union, and other oil-consuming countries to ease pressure on prices as global economy slides into recession.
The Organization of the Petroleum Exporting Countries and its Russia-led allies are set to meet in person in Vienna for the first time since before the COVID-19 pandemic. Some analysts anticipate the meeting could signal a shift in production policy from the larger OPEC+ group in their bid to defend oil prices that slid more than 40% from mid-June highs.
Media reports indicate both Saudi Arabia and Russia are considering a production cut as deep as 2 million barrels per day (bpd) for month of November, which could come on top of nominal production targets from the larger OPEC+ group, meaning the cuts would impact the existing oil output rather than missed quotas by smaller producers.
It has been well documented that Nigeria, Angola, and Ecuador have consistently underproduced their targets in recent months, making the impact of any shared production cut less impactful for the market. Instead, what could transpire is Saudi Arabia and Russia could announce a voluntary cut of 1.5 million bpd or more that could immediately close the gap between growing supply surpluses and weakening demand. If agreed upon, this would be the largest reduction to OPEC+ output since April 2020 when the group slashed collective production by 9.7 million bpd to offset demand destruction brought by the global pandemic, and a bullish surprise for the market.
For Russia, OPEC+'s second largest producer, a larger cut makes perfect sense as it struggles to expand its export markets under pressure from international sanctions and needs to increase the revenues from existing sales. Saudi officials, meanwhile, have signaled on multiple occasions that they are seeking a higher price to attract investments into new oil projects under pressure from the green energy transition.
Earlier this week, Saudi Aramco Chief Executive Amin Nasser also stressed limited spare capacity held by OPEC+ producers. Nasser estimated that global spare capacity stands at just 1.5% of current oil production, which in his view would be tapped the moment Beijing moves past its zero-COVID policy that has constrained China's economy.
Saudi officials have said on multiple occasions that the industry needs higher oil prices to incentivize new production amid the current transition towards green energy. Saudi's current oil output stands at 10.904 million bpd, according to OPEC's Oil Monthly Market Report, far below a record 12.3 million bpd the kingdom briefly reached in April 2020. Nasser furthered that Saudi Arabia won't reach its goal of 13 million bpd production capacity until at least 2027.
Separately, the American Petroleum Institute reported late Tuesday commercial crude oil stocks unexpectedly fell 1.770 million barrels (bbl) versus calls for a 1.3-million-bbl build. Stocks at the Cushing, Oklahoma, tank farm, the New York Mercantile Exchange delivery point for WTI futures, increased 925,000 bbl.
Data further showed gasoline stocks slid 3.474 million bbl in the reviewed week, more than three times calls for a draw of 1 million bbl. Distillate inventories tumbled 4.046 million bbl in the week ended Sept. 30 compared with an estimated 1.4 million bbl draw.
Next, investors will shift their focus to official inventory report from the U.S. Energy Information Administration scheduled for a 10:30 a.m. EDT release.
Near 7:45 a.m. EDT, November WTI futures traded fell $0.36 bbl to $86.15 bbl, and ICE Brent futures for December delivery slipped to $91.48 bbl, down $0.37. NYMEX November RBOB futures retreated 4.76 cents to $2.6354 gallon, with the front-month ULSD futures trading little changed near $3.5377 gallon.
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