OPEC and its partners in OPEC+ this weekend decided to extend their production cuts, including both voluntary and group-wide cuts, until 2025.
Energy Intelligence’s Amena Bakr reported that the voluntary cuts specifically would be extended until the third quarter of 2024, after which the countries currently cutting would begin to bring back production if the market conditions are right. Goldman Sachs Group Inc. said the decision was bearish given a recent increase in inventories, but UBS Group AG and RBC Capital Markets LLC expressed confidence the alliance will continue to diligently manage the market. Most analysts had expected OPEC+ to extend the curbs through to the end of the year.
Oil prices slipped despite the news of the solid extension of the overall cuts, likely because most of the total cuts, which amount to some 3.66 million bpd, per Bakr, come from the voluntary scheme, totaling some 2.2 million bpd. Another reason for the reaction of oil traders was probably the upward adjustment of the UAE’s production quota. The OPEC member has been grumbling against the production cuts so the rest of the cartel raised its production baseline by 300,000 bpd at this weekend’s meeting. However, “The deal should allay market fears of OPEC+ adding back barrels at a time when demand concerns are still rife,” Energy Aspects’ Amrita Sen told Reuters. The agreement aims to keep supporting oil prices while easing the production restraints against which some members — such as the United Arab Emirates — have chafed as they sought to have their output levels upgraded.
“The market had not expected an unwinding of the cuts from October,” said Vandana Hari, founder of Vanda Insights in Singapore. “On the positive side for OPEC+, the agreement should help maintain cohesion. A long term continuation of lopsided cuts would have been a source of friction.” Trading volumes were higher than usual on Monday, but oil option skews are still signaling bearishness. So-called puts — which profit from lower prices — remain at a wide premium over the opposite calls.Oil capped a monthly loss on Friday in part due to persistent concerns around the demand outlook for China, the world’s biggest crude importer. The prompt spread for Brent briefly slipped into a bearish contango structure last week, and fuel markets have been flashing signs of weakness.Futures are still higher this year after geopolitical tensions from the Middle East to Ukraine raised concerns about supply. Israel has pushed back on a cease-fire plan laid out by US President Joe Biden, as the war in Gaza approaches its eighth month. “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,” Saudi Arabia’s energy minister Abdulaziz bin Salman said, as quoted by Reuters, in comments on what market conditions OPEC would be looking for to start rolling back the cuts.