OPEC+ extends oil production cuts to support crude prices

The OPEC+ alliance of major oil producers has agreed to prolong its deep output cuts well into 2025, exceeding market expectations in a bid to support crude prices amid concerns over tepid global demand growth and rising U.S. production.

At a meeting on Sunday, the group comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia decided to extend the existing cuts of 3.66 million barrels per day (bpd) by a year until the end of 2025. Additionally, they agreed to prolong voluntary cuts of 2.2 million bpd by three months until the end of September 2024.

"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 Energy Minister Prince Abdulaziz bin Salman told reporters, justifying the move.

The decision underscores OPEC+'s commitment to supporting oil prices, which have hovered around $80 per barrel, a level deemed insufficient by many members to balance their budgets. Concerns over sluggish demand growth, particularly in China, the world's top oil importer, have weighed on prices, along with rising oil stocks in developed economies and high interest rates.

"The deal should allay market fears of OPEC+ adding back barrels at a time when demand concerns are still rife," said Amrita Sen, co-founder of the Energy Aspects think tank.

OPEC+ members are currently cutting output by a total of 5.86 million bpd, or about 5.7% of global demand. The group expects demand for its crude to average 43.65 million bpd in the second half of 2024, implying a drawdown of 2.63 million bpd if output remains at April's level of 41.02 million bpd.

However, the International Energy Agency (IEA), which represents top global consumers, estimates that demand for OPEC+ oil plus stocks will average much lower levels of 41.9 million bpd in 2024.

In a surprise move, OPEC+ postponed discussions on individual capacity targets for each member until November 2025, avoiding a potentially contentious issue. Instead, the United Arab Emirates (UAE) was granted a new output target, allowing it to gradually raise production by 0.3 million bpd from the current level of 2.9 million.

"It should be seen as a huge victory of solidarity for the group and Prince Abdulaziz," Sen said, referring to the influential Saudi energy minister who is credited with pre-cooking the deal behind the scenes.

The decision to extend the cuts comes as Saudi Arabia prepares to sell a new stake in state oil giant Aramco, a landmark deal that could raise as much as $13.1 billion to fund economic diversification efforts.

While the extension of voluntary cuts is "good news for non-OPEC+ crude oil producers," according to Stephen Innes of SPI Asset Management, it also "gives non-OPEC+ producers a chance to capitalize on the market conditions without the immediate pressure of increased competition from OPEC+ countries."

"With the current dynamics, non-OPEC+ producers can adjust their strategies and increase their market share before OPEC+ cuts are reconsidered," Innes said. "They have a window of opportunity to strengthen their positions and gain a competitive edge in the market before the landscape shifts again."

However, Innes cautioned that "notorious overproducers within the group may be less enthusiastic about output curtailments," suggesting potential challenges in implementing the agreed cuts.

The OPEC+ decided to extend all production cuts into next year, a deal that presumably suggests that oil prices will remain elevated until the end of 2025.

Saudi Arabia, with its recent aggressive approach, had a significant role in driving the deal. The country aims to strengthen both oil prices and government revenue by taking a firm stance on supply. The accord is expected to maintain a limited global oil supply and uphold prices at or above $80 per barrel.

The OPEC+ alliance's decision to extend deep output cuts into 2025 aims to bolster crude prices amid concerns over sluggish demand growth and rising non-OPEC supply. While the move is expected to support prices, its effectiveness will depend on the group's commitment to implementing the agreed cuts and navigating potential internal tensions.