OPEC+ extends cuts Seeking alpha

Written by Warren Patterson

What did OPEC+ agree on?

OPEC+ members met over the weekend to discuss production policy for the remainder of this year and 2025. It was a hybrid meeting, with the wider group attending via video While members who made additional voluntary cuts met in person in Riyadh. The meeting coincided with the Aramco meeting (Armco) A $12 billion secondary stock offering on Sunday, which sold out within hours.

Heading into the meeting, OPEC+ was somewhat concerned about the recent price action in the market. Brent crude on the Intercontinental Exchange has fallen more than 10% from its April highs, despite OPEC+ withholding a large amount of oil from the market. There are clear signs of weakness in the physical oil market. Refinery margins fell, raising the possibility of a decline in refinery operations, while the time spread for Brent crude fell significantly, indicating easing concern about… Market tightness in the near term.

In addition to some weaker fundamentals recently, expectations have been high for members to fully extend their additional voluntary cuts into the second half of 2024. Recent price action and expectations for the market to return to surplus have led to no extension of this view.

OPEC+ agreed on several aspects related to production policy at its various meetings on Sunday.

The first was an agreement to extend group-wide cuts of about 2 million barrels per day until the end of 2025. These cuts were previously scheduled to expire at the end of 2024.

Second, the voluntary supply reduction of 1.66 million barrels per day from nine OPEC+ members – introduced in May 2023 – has also been extended until the end of 2025. Likewise, these cuts were initially scheduled to expire at the end of this year.

Finally, the supply cuts that the market was most interested in were the additional voluntary supply cuts of 2.2 million barrels per day, which were scheduled to expire at the end of June 2024. The members decided to extend these cuts until the end of September 2024, after which this supply will be gradually restored. To the market until September 2025. The return of these barrels to the market will depend largely on market conditions. It was widely expected that these additional voluntary cuts would be extended. If anything happens, the market will be somewhat disappointed that it was only extended until the end of September instead of the end of 2024.

In addition, the UAE raised its 2025 production target by 300,000 barrels per day due to its increased production capacity.

In theory, canceling the additional voluntary supply cuts and increasing the UAE production target would mean that from October 2024 until the end of 2025, OPEC+ plans to return 2.5 million barrels per day of supply to the market.

OPEC+ production cut schedule (million barrels/day)

The extension pushes the market into deficit for the remainder of 2024

The action taken by OPEC+ over the weekend will push the oil market into deficit for the remainder of this year, assuming there are no demand disruptions. We expect a deficit of about 1.5 million barrels per day in the third quarter of this year and 700 thousand barrels per day in the fourth quarter. This deficit, especially during the peak demand period in the third quarter, would lead to higher oil prices during the summer months. Therefore, we maintain our current Brent crude oil forecast at $88 per barrel for this period. The risk of over-tightening the market leaves some upside to this view, but much will depend on how demand develops over the summer.

The planned return of oil supplies from October through most of 2025 would leave the market in marginal surplus through 2025, supporting the view that prices are heading down from their Q3 peak in 2024. Therefore, our average forecast remains Brent crude for 2025 is unchanged at $80 per barrel.

While extending the cuts gives the market clarity and should support prices in the short term, there is still a level of uncertainty as we head into the fourth quarter of the year, despite the group presenting a plan on how to bring supply back to the market. The unwinding of voluntary cuts is not set in stone and the group is likely to react to market dynamics sooner.

However, in the long term, OPEC+ will eventually have to accept the idea of ​​lower oil prices or risk losing more market share to non-OPEC+ producers.

The oil market is in deficit for the remainder of 2024 (million barrels per day)

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