Will oil prices stabilize after OPEC+ agrees to extend production cuts?

During Sunday's OPEC+ ministerial meeting, reports indicated that OPEC+ has reached a preliminary agreement to extend its production cut policy to 2025 and gradually phase out voluntary additional cuts from the end of September.

The specific content mainly includes:

• The joint production cut of 3.66 million barrels/day originally scheduled to expire at the end of 2024 has now been extended to the end of 2025.

• The voluntary production cut of 2.2 million barrels/day implemented by eight OPEC+ member states, including Saudi Arabia, the United Arab Emirates, and Iraq, will expire at the end of June and has now been extended to the end of September, this year.

• Between October 2024 and September 2025, the eight key OPEC+ members can gradually withdraw from the 2.2 million barrels/day production cut plan.

• Raise the official production quota of the United Arab Emirates by 300,000 barrels/day. It will be implemented from January 2025, and the production quota will increase from the current 2.9 million barrels/day to 3.519 million barrels/day by September 2025.

• It is expected that oil demand will increase by 2.2 million barrels/day this year.

According to relevant data forecasts, as the eight key OPEC+ members gradually withdraw from the voluntary production cuts, their daily output will rebound to some extent.

What does this mean for oil prices?

Against the background of high interest rates and high inflation, sustained weak global demand, and soaring production from competitors, OPEC+ has launched a series of complex production cut measures since the end of 2022.

Can the extended production cut plan boost oil prices as scheduled?

Goldman Sachs believes that the outcome of the OPEC+ meeting is bearish for the market, and the price of Brent crude oil product may fall below the range of $75-$90.

"Although clear production reduction plans further reduce the possibility of a full-scale price war and support the view that oil prices will stabilize within a certain range, at present, the risk of this range is clearly biased downward."

Goldman Sachs points out:

• The OPEC+ plan aims to curb oversupply by reducing production, but before 2025, eight countries including Saudi Arabia, Iraq, and Russia may gradually increase production.

• It is expected that oil demand will increase by 1.5 million barrels/day this year, which is lower than OPEC+'s forecast.

The market also seems to be bearish on oil prices.

Current futures trading position data shows that the WTI oil price is expected to be $73/barrel next year, a drop of more than 5% from the current level. According to the U.S. Commodity Futures Trading Commission (CFTC), fund managers in New York reduced their long positions by 20.6% and increased their short positions by 97.5% in WTI futures block orders in April.

Senior petroleum analyst Gary Ross said investors had already felt uneasy about the oil market.

"I'm not sure this agreement will make them feel safer."

At the same time, some OPEC+ countries are still "secretly increasing production." Data from Platts, a subsidiary of S&P Global that provides energy information, shows that Russia, Iraq and Kazakhstan exceeded their quotas by 200,000 barrels per day, 240,000 barrels per day and 72,000 barrels per day, respectively, in April this year.

However, some observers believe that the OPEC+ resolution may provide some support for oil prices. Raad Alkadiri, Senior Director of Energy Security and Climate Change at the Washington-based research institution, believes that "the oil market will not be disappointed with the plan."

The agreement is "highly flexible" and can still be adjusted in the future.

Some media also pointed out that considering that some member countries can "gradually withdraw" from the voluntary production cut plan, the agreement actually leaves a lot of room for future adjustments.

Goldman Sachs said that production increases can be paused or resumed depending on market conditions:

"If the market performs weakly and demand does not meet the expectations of OPEC+, then the production cut plan will be difficult to maintain."

Alkadiri also said:

"Even if market conditions change, OPEC+ can always change its policies."

As of press time, Brent and WTI crude oil prices continued to fall, with Brent down 0.15% at $80.99 per barrel and WTI down 0.12% at $76.9 per barrel.

Editor/ruby