OPEC+ extends oil production cuts

Rashid Husain SyedFollowing days of speculation, the Organization of Petroleum Exporting Countries (OPEC) and its allies in OPEC+ have agreed to extend their current production cuts into next year to support oil market prices.

The official output cut for OPEC+ is currently 3.66 million barrels per day (bpd). Additionally, eight leading producers in the group have agreed to extend their voluntary cuts, currently around 2.2 million bpd, into 2025, according to an OPEC+ document. However, these voluntary cuts, which include a one million bpd reduction from top producer Saudi Arabia, will only be maintained at the current level for three months before gradually being eased through September next year, the document states.

That option, according to a WSJ report, provides OPEC+ with considerable leeway to adjust their output depending on market conditions.

With most analysts expecting the output cuts to continue, market sentiments led to a drop in oil prices on Friday. U.S. oil finished down six percent, marking its worst performance since November, while global benchmark Brent fell 7.1 percent in May. Brent futures for July delivery dropped 24 cents, or 0.3 percent, to US$81.62 a barrel, while the more active August contract fell 77 cents, or 0.8 percent, to US$81.11. U.S. West Texas Intermediate (WTI) crude futures declined 92 cents, or 1.2 percent, to US$76.99. During the week, Brent settled down 0.6 percent, and WTI posted a one percent loss.

opec+ oil production cuts oil prices

Photo by John Cameron

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Risk sentiment seems to be dominating the markets, dampening demand outlook and overall market spirits. In the U.S., the market is flashing signs of weakness as crude cargoes pile up on the Gulf Coast. The glut has been a major challenge to OPEC+ efforts.

Oil demand in the U.S., the world’s largest market, has been lacklustre due to a warm winter that reduced heating oil demand and the Federal Reserve’s indications that interest rates will remain higher for longer, JPMorgan analysts said in a note last Friday. This challenges hopes for a demand rebound in the second half of the year.

Chinese refiners’ output has also slumped, and European refiners have been slow to return from spring maintenance, which has also pressured demand. China Petroleum & Chemical Corporation (Sinopec), the world’s biggest refiner, expects Chinese oil demand to peak before 2027, according to the 2024 edition of the China Energy Outlook 2060 Sinopec published last Wednesday.

In last year’s outlook, Sinopec had said that China’s oil consumption was expected to peak later this decade, between 2026 and 2030, due to an acceleration of EV adoption.

To make matters worse, last Thursday, the U.S. Energy Information Agency (EIA) reported weak fuel demand and a surprise jump in gasoline and distillate fuel stockpiles.

Although U.S. crude stocks fell more than expected as refiners ramped up to their highest utilization rates in over nine months, there was a surprise jump in gasoline and distillate fuel inventories as demand weakened and output rose.

Analysts had expected the U.S. Memorial Day holiday on May 27, the start of the U.S. summer driving season, would boost fuel demand. Yet EIA’s measure of gasoline demand slipped about two percent from the prior week to 9.15 million barrels per day.

“Weakness in gasoline markets have continued to drag down the rest of the oil complex,” Alex Hodes, oil analyst at brokerage StoneX, wrote on Thursday.

As OPEC+ was preparing to meet and decide its output level over the coming months, a Reuters poll showed on Friday that analysts had lowered their 2024 oil price forecast for the first time since February, reflecting lower risks to supply from ongoing wars in the Middle East and Ukraine. “The market has gradually discounted the ‘war premium’ associated with these geopolitical risks,” said SEB analyst Ole Hvalbye.

OPEC+ is feeling the heat. Despite efforts and output curbs, markets are not in its absolute control.

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. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.

For interview requests, click here.

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