On Sunday, the Organization of the Petroleum Exporting Countries and their partners in OPEC+ agreed to extend a series of production cuts first announced last year. The duration of that extension, widely expected to cover the second half of 2024, will instead cover the rest of this year and all of 2025. In a sense, OPEC blinked.
The idea behind the production cuts was to put a floor under oil prices and hopefully help them rise. With voluntary cuts by eight OPEC members of 2.2 million barrels per day and group-wide cuts of 3.66 million barrels per day, the total amount of oil withheld from the markets comes to almost 6 million barrels per day – an amount that is expected to be withheld for another eighteen months. And yet oil prices fell after the OPEC+ meeting and announcement. They dropped sharply.
The reason prices fell, which shows how much harder OPEC+’s job of controlling prices has become, was because of part of the official announcement. OPEC+ would extend its cuts, the group said, but could start phasing out some of them later this year if market conditions improve, i.e. if benchmarks reach desired levels.
Judging from the reaction of traders to the news that additional supply may come to the market, the chance of this is quite small. And this leaves OPEC+ with no choice but to stick with cuts for the foreseeable future – and hope that demand forecasts turn out to be correct.
Last month, OPEC’s secretary general reiterated the cartel’s demand growth forecast for 2024, which estimated growth at 2.2 million barrels per day, bringing the total to 104.5 million barrels per day. For next year, OPEC expects demand growth to weaken slightly to 1.8 million barrels per day. So it extended most of the cuts, although it agreed to grant the UAE a higher manufacturing base from January next year, meaning more production. The higher baseline adds 300,000 barrels per day to the UAE’s quota.
Those 300,000 barrels per day and news of lower US gasoline prices caused oil benchmarks to fall, with both Brent crude and WTI losing more than $4 per barrel per day. This slump means that the market is left with two opinions on OPEC’s demand projections, or more accurately, one opinion that does not match OPEC’s view of the situation.
Data for the first five months of the year seems to support the weak demand growth argument. Oil imports to Asia from January to May were 100,000 barrels per day higher than the same period in 2023, at an average of 27.19 million barrels per day, according to LSE Group data cited by Reuters’ Clyde Russell. This was much weaker growth than OPEC would need to achieve its 2.2 million barrels per day growth scenario, Russell said in a column this week.
A drop in the average price of gasoline in the United States also added to traders’ bearish sentiment that triggered the sell-off that pushed Brent down $4 a barrel and took WTI about $6 a barrel on Monday. GasBuddy reported that the average fell $0.058 to $3.50 per gallon, which immediately translated into weaker demand among the world’s largest crude oil consumer.
All this leaves OPEC+ with no real choice but to stick with cuts for as long as necessary and hope that demand will pick up in the second half of the year. This is not an ideal scenario, as some OPEC and OPEC+ producers would be perfectly happy with an oil price below $80 per barrel and a larger market share. These producers may at some point begin to grumble against the cuts, making it more difficult to keep them going. In any case, the cuts cannot last forever. OPEC’s only hope for success is stronger demand.
By Irina Slav for Oilprice.com
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