OPEC+ decided on Sunday to continue the majority of its significant oil production reductions until 2025 in an effort to support the market in the face of weak demand growth, elevated interest rates, and increasing competition from the U.S.
Brent crude oil prices have been hovering around $80 per barrel in the past few days, which is lower than the amount required by several OPEC+ countries to maintain fiscal balance. Concerns about sluggish demand growth in China, the world’s leading oil importer, have had a negative impact on prices, in addition to increasing oil inventories in developed countries.
OPEC and its allies, including Russia, known as OPEC+, have implemented significant reductions in oil production since late 2022.
Currently, OPEC+ nations are decreasing production by 5.86 million barrels per day, which is equivalent to roughly 5.7% of the worldwide demand.
This consists of reductions of 3.66 million bpd set to end in 2024, along with voluntary cuts from eight members totaling 2.2 million bpd expiring in June 2024.
On Sunday, OPEC+ decided to continue the reduction of 3.66 million bpd for another year until the end of 2025 and extend the 2.2 million bpd cuts for three more months until September 2024.
OPEC+ will slowly remove the 2.2 million bpd cuts over a twelve-month period starting from October 2024 until September 2025.
Saudi Energy Minister Prince Abdulaziz bin Salman told reporters that they are anticipating a decrease in interest rates and a more favorable path for economic growth, rather than sporadic growth in specific areas.
Prices subdued
In spite of the OPEC+ reductions, amounting to approximately 5.7% of worldwide crude output, and continued conflicts in the Middle East, global oil prices have dropped by roughly 11% after peaking in early April.
By 4.30 a.m., the global oil benchmark, Brent crude, saw a slight 0.1% increase to reach $81 per barrel. Monday at ET. It was priced at $91 in early April following a suspected Israeli airstrike on Iran’s embassy in Syria that caused anxiety in oil markets.
The cost of US benchmark West Texas Intermediate crude also increased by 0.1% on Monday morning to reach $77 per barrel. The price has decreased from almost $87 per barrel at the beginning of April.
According to the International Monetary Fund, Saudi Arabia requires Brent crude to be priced at approximately $81 per barrel for its budget to break even.
Decreased prices are partially due to the highest level of oil production in the US, leading to increased global supply, as well as worries about weak demand in China and other large economies.
The International Energy Agency reduced its prediction for the increase in worldwide oil consumption in the current year by 140,000 barrels daily to 1.1 million barrels daily in its latest monthly report, pointing to sluggish demand in developed countries, especially in Europe.
Even with the lower growth prediction, a shortage in supply could materialize. The International Energy Agency predicts that global supply will only rise by 580,000 barrels per day in the current year. The Paris-based agency predicted a shortage in supply for 2024 if OPEC+ continued their output reductions for the remainder of the year, as announced in March.
Challenges and strategic adjustments
The OPEC+ decision on Sunday aligns with Saudi Arabia’s additional sale of shares in its oil company Aramco. The government plans to sell a fraction of the Riyadh-listed company, potentially generating $13 billion for economic diversification initiatives.
Saudi Energy Minister Prince Abdulaziz bin Salman stressed the significance of being patient, stating, “We are anticipating a decrease in interest rates and a more favorable trajectory for economic expansion…not scattered areas of growth.” OPEC predicts that its crude oil demand will reach 43.65 million bpd in the latter half of 2024, suggesting a decrease in stocks if production stays at 41.02 million bpd as seen in April. Nevertheless, the decline in drawdown will lessen as voluntary cutbacks are gradually eliminated starting in October.
The IEA, which speaks for large consumers, forecasts a drop in demand for OPEC+ oil to 41.9 million barrels per day by 2024. As Amrita Sen, co-founder of Energy Aspects, stated, “The agreement should ease worries in the market about OPEC+ reintroducing barrels while demand uncertainties are still prevalent.”
Negotiations and new production targets
In a surprising development, OPEC+ delayed discussions on individual capacity targets for each member until November 2025. The UAE, pushing for a higher production limit, has successfully met a new goal that permits an increase in output of 0.3 million bpd from its current 2.9 million bpd.
The intricacy of the deal required extensive preparation, with Prince Abdulaziz engaging in discussions in private. Despite the majority of conversations taking place virtually, specific important ministers gathered in Riyadh on Sunday. Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia, and the United Arab Emirates are some of the countries opting to reduce their emissions voluntarily.
