Sunday’s decision by OPEC+ members did not take long to have its effects on the price of oil. As a reminder, the Organization of the Petroleum Exporting Countries (OPEC) and its alliance allies (OPEC+) announced an extension of current production cuts until the end of September, before gradually putting barrels back on the market at during the following 12 months, i.e. from October. Consequence: this Monday, Brent from the North Sea, the benchmark in Europe, lost 3.39%, slipping below the $80 mark (to $78.36). WTI, its American equivalent, fell by 3.59% to $74.22. Each is now at its lowest level since February.
The link between the drop in barrel prices and this decision, taken during a meeting held in a unique hybrid format – both by videoconference and in person in Riyadh – is in no doubt for Tamas Varga, PVM Energy analyst.
” The market [est] disappointed that the group is gradually easing some of its production limitations despite the absence of tangible signs of improvement in demand,” he told AFP.
This meeting had the advantage of clarifying when the group plans “the abandonment of its supply reduction policy”, explains Ipek Ozkardeskaya of Swissquote. And even if production cuts are maintained in the third quarter, Goldman Sachs describes the decision in a note as “ bearish » (accommodating). In other words, the fact that OPEC+ decides to open the oil valves in October is bearish for the market.
Oil: OPEC+ production cuts extended
Complex assembly
The OPEC+ strategy, initiated at the end of 2022 in the face of falling prices, aims to play on the scarcity of supply to boost prices. However, since its last meeting in November, the alliance has been able to keep crude prices fairly stable, around $80 per barrel for Brent from the North Sea like American WTI, without managing to get them off the ground.
In detail, OPEC+ members are currently reducing their production on three levels: firstly at group level, with official production targets reduced by 2 million barrels per day (mbd) since the end of 2022. These official quotas were extended until the end of 2025. Then came voluntary reductions by certain members, announced in April 2023, of the order of 1.65 mbd in total, also renewed until the end of 2025. Finally, eight members (Algeria, Iraq, Kuwait, Kazakhstan, Oman, Russia, Saudi Arabia and the United Arab Emirates) made additional voluntary reductions of approximately 2.2 mbd in November 2023 Following Sunday’s meeting, these additional reductions were extended until the end of September 2024.
In summary, the three OPEC+ cuts total a little less than 6 mbd, and are all extended at least until September. This complex assembly had initially left the prices of the rough marble.
Oil: Iraq wants to further increase its (already colossal) reserves of black gold
More barrels to come, a headache for OPEC+
The United Arab Emirates, however, obtained on Sunday an increase in their official production quota of 300,000 barrels per day, which will be implemented gradually from January to September 2025. This increase allows them to keep facade cuts, while increasing their volumes. So, with the end of additional voluntary cuts and the increase in the Emirates’ production target, OPEC+ could reintroduce 2.5 mbd from September 2024 to September 2025.
Reintroducing these barrels without flooding the market or plunging prices into the red promises to be a real headache for the enlarged group, in particular “if the demand outlook remains negative”, notes Lukman Otunuga. According to DNB analysts, the group of exporting countries will even have to mourn the loss of a barrel of Brent at more than $80 “if (the alliance) acts as planned”, not seeing “no room for additional OPEC+ barrels on the market”.
But for OPEC, global oil demand in 2024 is expected to remain high, as indicated in its April monthly report. Oil consumption needs will be “supported by strong demand for air transport” and the ” good health “ road transport, as well as the performance of the industrial, construction and agricultural sectors in non-OECD countries, the organization said. An opinion not shared by the International Energy Agency (IEA), which also revised downwards its estimate of growth in demand in 2024, also in its monthly report in April. “It is almost de rigeur that the IEA and OPEC disagree on the growth in oil demand,” however, underlined John Evans, of PVM Energy.
OPEC+ also recalled that it retained the possibility of stopping or even reversing the exit from one of its production reduction layers if market conditions deteriorate. Understand: if prices sink.
(With AFP)
