The Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed on Sunday to extend their oil output cuts well into 2025.
This strategic extension is designed to shore up the market amid lackluster demand growth, high interest rates, and increasing competition from U.S. oil production.
Prolonged Cuts Amid Economic Uncertainty
Since late 2022, OPEC+ has implemented a series of deep output cuts to address declining oil prices and fluctuating demand. Currently, the group is reducing output by 5.86 million barrels per day (bpd), which represents approximately 5.7% of global demand.
This includes a substantial cut of 3.66 million bpd, originally set to expire at the end of 2024, and additional voluntary reductions totaling 2.2 million bpd, scheduled to conclude at the end of June 2024.
Under the new agreement, the 3.66 million bpd cut will be extended by a year, now expiring at the end of 2025.
Meanwhile, the voluntary cuts of 2.2 million bpd will be extended by three months to the end of September 2024. These cuts will then be gradually phased out over a year, starting in October 2024 and ending in September 2025.
Market Dynamics and Strategic Adjustments
This extension comes as Brent crude oil prices hover around $80 per barrel, below the fiscal break-even point for many OPEC+ members.
Concerns over sluggish demand in China, the world’s largest oil importer, coupled with rising oil stocks in developed economies, have contributed to the downward pressure on prices.
Saudi Energy Minister Prince Abdulaziz bin Salman said, “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.”
The group’s cautious approach reflects a broader strategy to avoid a sudden influx of oil into the market, which could further depress prices. By extending and gradually phasing out cuts, OPEC+ aims to manage supply carefully while monitoring demand recovery.
Impact on Global Oil Market
The decision is expected to ease market fears of a sudden increase in OPEC+ production, which could exacerbate current oversupply issues.
Amrita Sen, co-founder of the Energy Aspects think tank, noted, “The deal should allay market fears of OPEC+ adding back barrels at a time when demand concerns are still rife.”
The International Energy Agency (IEA) projects that demand for OPEC+ oil, along with stock levels, will average around 41.9 million bpd in 2024, lower than OPEC’s estimates. This discrepancy underscores the uncertainties facing the global oil market.
Looking Ahead
While the extension of cuts marks a significant step towards stabilizing the market, challenges remain.
The United Arab Emirates (UAE), for instance, secured a new output target allowing for a gradual increase in production by 0.3 million bpd, reflecting its push for a higher quota.
Also, discussions on individual capacity targets for 2025 have been postponed to November 2025, highlighting ongoing negotiations within the group.
Prince Abdulaziz played a crucial role in orchestrating the deal, inviting key ministers to Riyadh for face-to-face discussions despite the primarily online meeting format. This hands-on approach was instrumental in reaching a consensus.
As OPEC+ prepares for its next meeting on December 1, 2024, the group’s ability to navigate complex market dynamics and internal negotiations will be critical in maintaining market stability.
The extended cuts demonstrate OPEC+’s commitment to addressing current economic challenges and ensuring a balanced oil market in the years ahead.