OPEC+ expected to deliver big oil cut this week

When delegates meet in Vienna on Wednesday, OPEC is expected to deliver a big cut in oil production, but the reduction may sound more impressive than it really is, according to economists and analysts.

That is because OPEC - the Saudi-led coalition of the Organization of the Petroleum Exporting Countries and other major producers, including Russia, has fallen short of its existing production targets.

In August, OPEC had pumped around 30 million barrels a day mb d, which is about 3.5 mb d less than the official quota, meaning that global supply is almost 4% lower than anticipated, according to a Tuesday note by Campanella, economist at UniCredit Bank in Milan.

Read: OPEC may cut oil production because it is trying to halt a sharp crude selloff.

He said that the struggle is because most countries, with the exception of Saudi Arabia and the United Arab Emirates, lack spare capacity because of years of underinvestment. That is particularly true for Nigeria and Angola. Western sanctions are weighing on Russian oil, which is only partly being diverted to Asia from Europe, according to the economist.

If the group cuts target production by 1 mb d, actual output would drop by about 550,000 barrels a day - as countries like Russia or Nigeria that are producing below quota would see their formal target decline, but remain above what they can currently produce, he said.

The prospect of a large cut has helped crude oil prices bounce this week, with West Texas Intermediate crude CL. 1, CLX 22, the U.S. benchmark, and Brent crude BRN 00, the global benchmark, has gone up more than 5% on Monday and rose further in early Tuesday trade.

The November WTI futures increased by 1.4% to $84.76 a barrel Tuesday morning, while the December Brent rose 1.6% to $90.29 a barrel.

Campanella said that while the effects on production would be limited, new OPEC curbs could help to focus the market s attention on tight supply and away from concerns of weak demand, putting a price floor at $90 a barrel for Brent.

Supply constraints are a persistent feature of today's oil market and could be further exacerbated by the war in Ukraine, depleting strategic petroleum reserves and underinvestment in the U.S. pushing Brent prices back above $100 bbl barrel already this quarter, he wrote.