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Oil prices drop to 2-week lows as doubts linger over OPEC+ production cuts

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Oil futures fell Monday to their lowest levels in more than two weeks, building on recent declines that came after a round of voluntary production cuts announced by OPEC+ left traders skeptical about compliance.

Price action

  • West Texas Intermediate crude for January delivery
    CL00,
    -0.01%

    CL.1,
    -0.01%

    CLF24,
    -0.01%

    fell 85 cents, or 1.2%, to $73.22 a barrel on the New York Mercantile Exchange,

  • February Brent crude
    BRN00,
    +0.09%

    BRNG24,
    +0.09%

    dropped $1.29, or 1.6%, $77.59 a barrel on ICE Futures Europe.

  • January gasoline was down 0.1% at $2.1198 a gallon, while January heating oil
    HOF24,
    +1.32%

    edge down 0.4% to $2.6501 a gallon.

  • January natural gas
    NGF24,
    -4.73%

    declined 5.3% to $2.664 per million British thermal units.

Market drivers

The OPEC+ deal last week was “unconvincing, to say the least, and oil prices have been in decline ever since,” said Craig Erlam, senior market analyst at OANDA.

“With markets seemingly anticipating more of an economic slowdown next year, the announcement simply doesn’t go far enough,” he said in market commentary. “It’s another large cut but how much will actually be delivered on? And are we at the limits of what the alliance is willing to achieve to balance the markets?”

Crude prices ended last week with back-to-back losses after OPEC+ producers on Thursday agreed to voluntarily cut around 2.2 million barrels a day (mbd) of crude from the market in the first quarter of next year, a figure that included a widely expected extension of Saudi Arabia’s 1 mbd voluntary output cut and Russia’s 300,000 barrel a day cut to crude exports.

OPEC+ cuts “look like they have rebalanced the market” for the first quarter of next year, but without further OPEC+ cuts in supply from the second quarter, “oil looks to register a 1 mbd surplus in that quarter, analysts at Citi wrote in a note dated Monday.

The voluntary nature of the overall reductions sparked skepticism around enforcement and compliance, analysts said.

“Soft price action since the OPEC+ meeting is reflective of an investor cohort that remains perplexed on how to deploy risk. The near-term path of least resistance is lower, given the degree of ambiguity and lack of catalysts,” Michael Tran, commodity and digital intelligence strategist at RBC Capital Markets, said in a Sunday note.

“Oil has become a ‘show me’ type market. Now here comes the hard part: Prices will likely remain volatile and potentially directionless until the market sees clear data points pertaining to the voluntary output cuts,” he said.

Those cuts won’t be implemented until next month, with country-level production and export data to follow. That means it will be a “long and volatile” two months before there is even preliminary clarity on compliance — “a long stretch for a market that is seeing a high degree of uncertainty, lack of risk deployment and a liquidity vacuum,” Tran wrote.

Traders were also monitoring developments in the Middle East following an escalation of maritime attacks related to the Israel-Hamas war.

Ballistic missiles fired by Yemen’s Houthi rebels hit three commercial ships Sunday in the Red Sea, while a U.S. warship shot down three drones in self-defense during the hourslong assault, according to the U.S. military. The Iranian-backed Houthis claimed two of the attacks.

Oil futures spiked higher following the Hamas attack on southern Israel on Oct. 7 but failed to challenge their late September highs. Crude subsequently fell back as fears of a broader conflict that could threaten crude flows faded, trading well below levels seen just before the start of the conflict.

— Associated Press contributed.

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