The Organization of the Petroleum Exporting Countries (OPEC) and its allied producers, collectively known as OPEC+, have taken a decisive step to shore up the global oil market by extending their deep production cuts into the next year. This strategic move comes as the group grapples with sluggish demand growth, elevated interest rates, and increasing rivalry from US oil production.
Brent crude oil prices have been hovering around USD 80 per barrel in recent days, a level that falls short of what many OPEC+ members require to balance their national budgets. Concerns over slow demand growth in China, the world’s largest oil importer, coupled with rising oil stockpiles in developed economies, have exerted downward pressure on prices.
Under the agreement reached on Sunday, OPEC+ has decided to extend the existing cuts of 3.66 million barrels per day (bpd) by an additional year, until the end of 2025. Furthermore, the voluntary cuts of 2.2 million bpd by eight member countries, initially set to expire at the end of June 2024, will be prolonged by three months until the end of September 2024.
However, OPEC+ has also outlined a plan to gradually phase out the voluntary cuts of 2.2 million bpd over the course of a year, from October 2024 to September 2025. This approach aims to strike a balance between supporting prices and responding to potential shifts in demand.
Saudi Energy Minister Prince Abdulaziz bin Salman, a key figure in the OPEC+ negotiations, acknowledged the group’s concerns regarding economic growth and interest rate trajectories. He stated, “We are waiting for interest rates to come down and a better trajectory when it comes to economic growth… not pockets of growth here and there.”
OPEC’s projections suggest that demand for OPEC+ crude will average 43.65 million bpd in the second half of 2024, implying a drawdown of 2.63 million bpd if the group maintains its April output level of 41.02 million bpd. However, this drawdown is expected to be less once OPEC+ begins phasing out the voluntary cuts in October.
The International Energy Agency (IEA), representing top global consumers, estimates a lower average demand for OPEC+ oil plus stocks, at 41.9 million bpd in 2024.
Prince Abdulaziz emphasised OPEC+’s willingness to adapt to changing market conditions, stating that the group could pause or reverse the unwinding of cuts if demand proves insufficient. This flexibility aims to ensure a responsive approach to evolving supply-demand dynamics.
Amrita Sen, co-founder of the Energy Aspects think tank, praised the deal, stating, “The deal should allay market fears of OPEC+ adding back barrels at a time when demand concerns are still rife.”
As OPEC+ navigates the complexities of the global oil market, its commitment to supporting prices through coordinated production cuts reflects the group’s determination to maintain market stability and address the challenges posed by fluctuating demand and rising competition.