OPEC+ agreed on Sunday to extend its substantial oil output cuts through 2025. This move aims to stabilize the market amidst sluggish demand growth, high interest rates, and increased U.S. production.
Recently, Brent crude oil prices have hovered around $80 per barrel, a figure below the budgetary needs of many OPEC+ members. Concerns over slow demand growth in China, the world's top oil importer, and rising oil stocks in developed countries have further pressured prices.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, have implemented significant output cuts since late 2022. Currently, OPEC+ is cutting 5.86 million barrels per day (bpd), about 5.7% of global demand. This includes 3.66 million bpd of cuts set to expire at the end of 2024 and voluntary cuts by eight members totaling 2.2 million bpd, expiring in June 2024.
On Sunday, OPEC+ decided to extend the 3.66 million bpd cuts until the end of 2025 and prolong the 2.2 million bpd cuts until the end of September 2024. The 2.2 million bpd cuts will be phased out from October 2024 to September 2025.
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Saudi Energy Minister Prince Abdulaziz bin Salman emphasized the need for lower interest rates and more consistent economic growth. He indicated that OPEC+ could pause or reverse the cuts if demand remains weak.
OPEC expects demand for its crude to average 43.65 million bpd in the second half of 2024. This implies a drawdown of 2.63 million bpd if April’s output of 41.02 million bpd is maintained. The drawdown will be less significant once the 2.2 million bpd voluntary cuts start phasing out.
The International Energy Agency, representing top global consumers, projects lower demand for OPEC+ oil at 41.9 million bpd in 2024. Amrita Sen, co-founder of Energy Aspects, stated that the deal should ease market concerns about OPEC+ increasing supply amid ongoing demand worries.
Analysts anticipated a few months' extension of the voluntary cuts due to falling prices and weak demand. However, they predicted difficulties in setting 2025 targets due to unresolved individual capacity targets, a point of past contention. The UAE, seeking a higher production quota, saw a surprise development with OPEC+ postponing capacity discussions until November 2025. The UAE will gradually raise its production by 0.3 million bpd from the current 2.9 million.
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Prince Abdulaziz cited challenges for independent consultants to assess Russian data due to Western sanctions. Sunday's meetings lasted less than four hours, with Prince Abdulaziz having spent days preparing the deal. He invited key ministers to Riyadh, despite the meetings being scheduled online.
Countries with voluntary cuts include Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia, and the UAE. Sen remarked that the deal signifies a significant victory for Prince Abdulaziz and the group's solidarity, easing fears of Saudi Arabia increasing output due to Aramco’s share listing.
Saudi Arabia plans to sell a new stake in Aramco to raise up to $13.1 billion, funding Crown Prince Mohammed bin Salman’s economic diversification plans. OPEC+ will hold its next meeting on December 1, 2024.
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