OPEC+, which includes countries such as Saudi Arabia and Russia, announced on June 2 the extension of oil production cuts until 2025. This decision aims to support revenues from oil sales in a context of demand weak, high interest rates and competition with US manufacturing.
The expected reduction is two million barrels per day. Bloomberg reports that some nations have chosen to extend voluntary restrictions into the third quarter of 2024. At this time, specific details have not been released as countries tend to report figures separately.
Extension of production cuts
OPEC+ is a coalition, which since 2016 has expanded the original OPEC format to include ten new members including Russia, Kazakhstan and Mexico; it joins countries such as Saudi Arabia, Algeria, Nigeria and Venezuela. Overall, the 24 member countries control over half of the world’s oil production and approximately 90% of known reserves.
Currently, oil production cuts amount to 5.86 million barrels per day, 5.7% of global demand. These include 3.66 million barrels per day previously set to expire at the end of 2024 and voluntary cuts of 2.2 million barrels per day until June 2024. OPEC+ has now extended the cuts by 3.66 million barrels per day until the end of 2025 and 2.2 million barrels per day until the end of September 2024.
The voluntary cuts will not be withdrawn abruptly in September, but gradually between October 2024 and September 2025. The aim is to support oil prices and public finances, despite high global interest rates. Saudi Energy Minister Prince Abdulaziz bin Salman explained that they expect a decline in interest rates and better economic growth.
Geopolitical reasons behind the extension of the cuts
Saudi Arabia needs higher oil prices to finance Crown Prince Mohammed bin Salman’s plans to diversify the national economy away from fossil fuel exports. At the same time, an increase in oil prices would support Russia in maintaining economic growth and stability, despite huge expenditures on the war against Ukraine.
Stable prices, market reactions and forecasts
Mukesh Sahdev, analyst at Rystad Energy, reports an “important challenge” for OPEC+: the volumes actually placed on the market could be greater than those officially declared, threatening the cartel’s strategy. In the first quarter, Iraq and Kazakhstan exceeded their quotas, while Russia recorded overproduction in April.
Since the November meeting, the group has managed to keep crude prices fairly stable, with North Sea Brent and US WTI hovering around $80 a barrel, but without achieving a significant increase. OPEC+ continues to keep its demand forecasts for 2024 constant in its various reports, while the International Energy Agency (IEA) has revised its estimates downwards, showing a less optimistic approach.
The analysts of Goldman Sachs they considered the decision “bearish”, as the gradual withdrawal of the cuts was already expected. They also pointed out that a detailed plan makes it difficult to keep production levels low in a potentially weak market.
Currently, the price of WTI has fallen below $77, while Brent crude oil remains stable around $80. The negative reaction is also due to OPEC+’s optimistic forecasts for oil demand, contrasting with the lower estimates of the International Energy Agency. OPEC expects average demand of 43.65 million barrels in the second half of 2024, while the IEA estimates overall demand of 41.9 million barrels per day for the full year.
