OPEC+ extends cuts to 2025 but may reduce earlier if the market improves. Markets react negatively, causing a drop in oil prices
The Organization of Petroleum Exporting Countries and its allies in the extended OPEC+ are in damage control.
On Sunday, June 2, OPEC+ agreed to extend production cuts until the end of 2025. However, the announcement included a caveat: OPEC+ may start to wind down some of these cuts later in the year if market conditions improve and benchmarks reach the desired level. The cuts will be maintained until the next quarter but will then be gradually phased out on a monthly basis over the final quarter of 2024 and the first three quarters of 2025.
The caveat was meant to provide some latitude to the organization to open taps later this year.
Unfortunately for OPEC+, the caveat dampened market spirits, leading to an oil price selloff. Front-month Brent dropped to a four-month low below US$77 per barrel – a hefty US$8 per barrel decline from the previous week’s high and more than US$15 per barrel lower than April’s year-to-date high.
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Brent crude was trading down well over three percent last Monday, marking the first time the global benchmark has been below US$80 since February. The U.S. crude benchmark was down over 3.5 percent following the OPEC+ announcement.
Crude oil prices moved lower further after the U.S. Energy Information Administration reported an estimated inventory build of 1.2 million barrels for the week to May 31.
Goldman Sachs said that the OPEC+ plan to start bringing back some production is negative for oil prices as it shows producers’ desire to pump more crude as soon as the market conditions allow. “The communication of a surprisingly detailed default plan to unwind extra cuts makes it harder to maintain low production if the market turns out softer than bullish OPEC expectations,” analysts at Goldman Sachs wrote in a note carried by Reuters.
To salvage the markets, the OPEC+ had to get into action. And so, it did.
The energy ministers of major OPEC+ producers dismissed the market’s bearish reaction, stating that participants and analysts would soon understand that the alliance made the right decision in communicating its intentions.
While speaking at Russia’s Economic Forum in St. Petersburg, Prince Abdulaziz bin Salman, the influential Saudi oil minister, clarified that OPEC+ can pause or reverse oil production increases if the market weakens. “It’s a year-and-a-half agreement with all the mechanics in place, some of which we have used before, especially the option to pause or reverse production increases,” he said, referring to previous instances when OPEC+ chose to halt the release of more oil.
Russian Deputy Prime Minister Alexander Novak stated that the group might adjust the deal if necessary, attributing the post-meeting price drop to a misinterpretation of the agreement and “speculative factors.” “We are ready to react quickly to market uncertainties,” Novak said at the conference. OPEC Secretary General Haitham Al Ghais, citing a rebound in travel, also insisted that oil demand was strong.
Following the reaction from OPEC+ leaders, markets rebounded somewhat. Oil futures reduced their weekly losses. On Thursday, prices began recovering from their lows, with West Texas Intermediate rising to nearly US$76 a barrel on Friday, rebounding from the four-month lows hit earlier on Monday. “OPEC+ members launched a charm offensive, with the major players of the pact demonstrating unity,” Bloomberg quoted John Evans, an analyst at PVM Oil Associates Ltd. “The intervention showed decent success as it was very well-timed.”
But despite OPEC+’s clarifications, the impact of its original announcement lingered. Oil prices edged down on Friday, marking a third consecutive weekly loss. Investors weighed OPEC+’s reassurances against the latest U.S. jobs data, which lowered expectations for a Federal Reserve interest rate cut. Brent crude futures settled 25 cents lower at $79.62 a barrel, while U.S. West Texas Intermediate crude (WTI) fell two cents to US$75.53.
What prompted OPEC+ to announce the unwinding of some voluntary output cuts?
According to analysts, declining market share has become too painful and contentious for OPEC+ to sustain. In recent months, several OPEC+ members, including the UAE and Iraq, have been pushing for higher output quotas. By volunteering an additional output cut of one million barrels per day (bpd), Saudi Arabia has been under considerable pressure to reduce its production. This is not to the liking of Riyadh, which wants to move away from its role as the sole swing producer, a position it held in the 1980s, where it adjusted production to meet market needs.
However, from the market’s perspective, it seems that OPEC+ cannot significantly manipulate output cuts. At least for now.
Yet, from the perspective of the market reaction, it seems that OPEC+ cannot play around much with output cuts for now.
Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
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