Key Takeaways
OPEC+ decided to extend oil production cuts into next year to keep prices higher and generate necessary revenue.
Russia, Iraq and Kazakhstan have been producing over their quotas.
Increased production may begin later this year with voluntary cuts slowly declining and in January, with the United Arab Emirates allowed another increase to its quota.
Oil demand is expected to grow this year as is non-OPEC oil production.
U.S. production increases are expected to slow from last year’s impressive gains as producers defer investment in the wake of uncertainty caused by Biden’s efforts to end fossil fuels.
OPEC+ agreed to extend all production curbs into next year, which likely will keep oil prices elevated through the U.S. presidential election. The cartel will put out limited supplies of petroleum through the end of next year in an effort to keep global oil prices up. Brent crude is running in the low $80s a barrel. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) have established official reductions of 3.66 million barrels a day. The group, however, laid out steps for gradually increasing production starting this fall. The new deal includes the United Arab Emirates securing another upgrade to its official production quota, by 300,000 barrels a day. The UAE’s new official quota will be gradually phased in starting in January and stand at 3.519 million barrels a day by September 2025. The latest agreement gives the cartel considerably leeway to make adjustments depending on market conditions.
In a statement, OPEC+ said it would extend a cut of 1.65 million barrels per day, announced in April 2023, until the end of 2025. That cut was due to expire at the end of this year. Eight top producers in the group also agreed to continue voluntary cuts, announced in November, into 2025, currently around 2.2 million barrels a day, according to an OPEC+ document. The voluntary cuts, which include a production cut of one million barrels a day from Saudi Arabia, will be maintained for three months before being gradually eased through September of next year. The curbs are aimed at bolstering prices and avoiding a global surplus in a context of rising output from other nonmember producers, particularly the United States, and concerns over demand amid high interest rates and inflation.
The further extension of cuts could tip global oil markets into a supply deficit, pushing up oil prices. Demand for OPEC+ oil is expected to increase next year by 800,000 barrels a day, according to the cartel. Lagging compliance to agreed curbs has been a bone of contention between Saudi Arabia and other top producers. Russia, Iraq and Kazakhstan respectively overproduced 200,000 barrels a day, 240,000 barrels a day and 72,000 barrels a day in April. In recent months, flows of Russia’s oil to global markets were boosted by 400,000 barrels a day as Ukrainian attacks on its refineries reduced Moscow’s capacity to process the oil at home. But those export barrels are set to decline in the summer as Russia’s refineries restart.
The latest OPEC+ decisions mean that it will continue to restrict supply for at least the next 18 months but gradually start adding some barrels back into the market later this year. Despite the OPEC+ cuts, in total equivalent to about 5.7 percent of global oil supply, and ongoing tensions in the Middle East, global oil prices have fallen by about 11 percent since hitting a five-month high in early April.
Saudi Arabia needs Brent crude to trade at around $81 a barrel in order to balance its budget, according to the International Monetary Fund. Subdued prices have partly been the result of record U.S. oil output, which has bumped up global supply, and concerns about sluggish demand in China — the world’s biggest importer of oil — and other major economies. For 2024, according to Stratas Advisors, increasing supply will be more challenging unless U.S. producers start ramping up their capital expenditures and drilling programs beyond their current plans. That is unlikely to happen on federal lands, as the Biden administration ups fees to produce oil and gas based on the Democrat-passed Inflation Reduction Act and restricts access to lands through fewer and fewer lease sales. Biden has leased the fewest acres of lands since WWII, and is continuing to shrink the number of acres available for lease.
In its most recent monthly report, the International Energy Agency (IEA) cut its forecast for the growth in global oil demand this year by 140,000 barrels per day to 1.1 million barrels per day, citing weak demand in developed economies, particularly in Europe. Despite the weaker growth forecast, a supply deficit could develop. The IEA expects global supply to increase by just 580,000 barrels per day this year. In March, the Paris-based agency said it expected there to be a deficit in supply in 2024 if OPEC+ extended its output cuts through the rest of the year. In contrast, the Energy Information administration expects oil demand this year to increase by almost 1 million barrels per day with global supply matching demand, with the additional production coming from non-OPEC, mostly from the United States, Canada, Brazil and Guyana.
The United States may be adding to IEA’s lower demand forecast as the U.S. gasoline market is showing signs of weakness at the start of summer driving season, at a time when it generally picks up strongly. For the week ended May 24, just before the Memorial Day holiday, U.S. gasoline demand fell about 2 percent week-over-week to 9.15 million barrels a day, despite refiners ramping up production to their highest run-rate in nine months. That led to an increase in gasoline inventories and lower gas prices. Likewise, U.S. diesel demand dropped to its lowest seasonal level in 26 years in March, to 3.67 million barrels per day, driven by slowing economic growth.
Conclusion
OPEC+ has decided to extend its oil production cuts into next year but will be allowing voluntary cuts to slowly start declining beginning this fall. Saudi Arabia needs oil prices at around $81 a barrel to balance its budget and it is extending its cuts to keep the Brent crude oil prices in the low $80s. Oil demand is expected to grow this year as is non-OPEC oil production. Whether demand and supply forecasts are expected to balance is dependent on the forecaster, with EIA believing it will and IEA indicating that it may not, particularly with the extension of OPEC+ production cuts into next year.
