Secretary General, Organisation of Petroleum Exporting Countries (OPEC), Haitham Al Ghais, at the weekend rose in defence of the body’s decision to phase out production cuts from October this year, despite the market reacting bearishly and the price of oil dropping by almost $4 a barrel.
Recall that the OPEC+, a group of major oil producing countries with the larger OPEC body, had recently agreed to extend most of its oil output cuts into 2025 but left room for voluntary cuts from eight members to be gradually unwound from October onward. Investors were worried that a complicated OPEC+ output decision could lead to higher supplies later in the year even though demand growth has been slow. The curbs are aimed at bolstering prices and avoiding a global surplus in a context of rising output from other non member producers, particularly the U.S., and concerns over demand amid high interest rates and inflation. OPEC+ agreed to maintain other cuts amounting to 3.66 mbpd until the end of 2025. Russia was among the countries that agreed to phase out voluntary cuts. Russia currently has a 471,000-barrels-per-day (bpd) cut in place and aims to meet a production target of nine mbdp by the end of the month, Reuters reported.
OPEC+ accounts for around 40 per cent of all global oil production. OPEC currently has 13 members: Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, Iran, Algeria, Angola, Libya, Nigeria, Congo, Equatorial Guinea, Gabon and Venezuela. Ten more non-OPEC countries form OPEC+ with the 13 OPEC members: Russia, Azerbaijan, Kazakhstan, Bahrain, Brunei, Malaysia, Mexico, Oman, South Sudan and Sudan.
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The curbs had been due to expire at the end of the year. Under the latest agreement reached, the United Arab Emirates will see its production quota gradually lifted by 300,000 barrels a day between January and September of next year.
Separately, a round of 2.2 mbd in additional, voluntary cuts, including a one mbd reduction by Saudi Arabia, that were due to expire at the of June were extended through September, according to a statement issued by Saudi Arabia.
The statement said the cuts would be restored gradually, on a monthly basis, until the end of 2025 and the phaseout can be stopped or reversed depending on market developments.
Speaking at the St. Petersburg International Economic Forum in Russia, Al Ghais defended the move by OPEC+ to extend its oil cuts into 2025. The decision, however, left the door open for voluntary cuts from eight members to be gradually phased out from October this year.
Al Ghais called the recent OPEC+ decision a success. However, the markets reacted bearishly to the move as investors were concerned that the OPEC+ output decision could lead to oversupply later in 2024 despite slow demand growth.
The price of Brent crude, a global benchmark for the price of oil, tumbled from $80.04 when markets closed on Friday 31 May before the June 2 decision, to a low of $75.85 on Tuesday June 4. On Thursday Brent crude was trading above $78, increasing in value amid growing expectation of an interest cut from the US Federal Reserve on June 12. The European Central Bank on Thursday announced its first rate cut since 2019, lowering it to 3.75 per cent from the record four per cent it has been since September last year.
Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman insisted that OPEC+’s decision was driven by the need to chase market share and he criticised media reporting around the organisation’s meetings.
“They fiddle with the market. Sunday was no exception,” he said, referring to the media and analysts. People are now saying that OPEC+ is shifting from being a price fixer to a market share fighter,” the prince told a ministerial panel.
He claimed the media speculation always raises expectations about what OPEC+ will do, in a way that distorts the market. “In all of the cases, they will try to raise expectations about what OPEC+ will do. So, when that decision is taken, it would have to be lower than that expectation,” he added.
The sluggish global demand growth for crude has mainly been fueled by a shaky economic recovery from the COVID-19 pandemic from the world’s top oil consumer, China. Furthermore, surging exports from the United States and Guyana have flooded the market, leading to OPEC+ making output cuts earlier this year.
Also, UAE’s energy minister Suhail Al Mazrouei said his country was committed to OPEC+, consumers and the market, despite some media reports suggesting that the UAE is disregarding output criteria prescribed by the group.
A Bloomberg report found that Iraq and the UAE continued to pump above their assigned quotas. According to the data published, Baghdad and Abu Dhabi had not fully implemented their supply cuts agreed with other OPEC members at the start of the year.
However, Al Mazrouei said that the UAE and Iraq had been making cuts to stabilise the market.
“I would call them the ‘great 8’, have been sacrificing these additional voluntary cuts to stabilise the market. UAE has been committed to this group, committed to the consumers and the market,” he said, referring to the oil producers the UAE, Iraq, Saudi Arabia, Russia, Algeria, Kazakhstan, Kuwait and Oman.
The managing partner at SPI Asset Management, Stephen Innes, told MarketWatch that the effectiveness of OPEC+’s strategy will depend on the group’s collective commitment and actual implementation of the agreed cuts. “The next meeting will be held on Dec. 1, so we will likely get more clarity on how OPEC plans to allow more supply back into the market as the voluntary cuts get walked back,” said Innes.
He explained that the extension of the voluntary cuts is however “good news for non-OPEC+ crude oil producers as it gives non-OPEC+ producers a chance to capitalise on the market conditions without the immediate pressure of increased competition from OPEC+ countries.”
“With the current dynamics, non-OPEC+ producers can adjust their strategies and increase their market share before OPEC+ cuts are reconsidered,” said Innes. “They have a window of opportunity to strengthen their positions and gain a competitive edge in the market before the landscape shifts again.”
An energy analyst at Jefferies, Giacomo Romeo, noted that “the decision to bring back barrels from October 2024 onwards is probably going to be taken as a small incremental negative. Based on the firm’s supply/demand estimates, the plan to bring 150,000 barrels a day back onto the market in monthly increments will turn the fourth-quarter inventory balance from draws into small builds, he said.
The effect on 2025 expectations, however, will likely be relatively neutral as most forecasts had included an eventual reversal of the voluntary cuts.
