Naturally, yesterday was about assessing the potential impact of the weekend’s meeting of major oil producers which form the OPEC+ alliance. To reiterate what was expected: the cartel was widely anticipated to leave quotas unchanged throughout the third quarter and possibly until the end of the calendar. It mainly lived up to expectations. What was not foreseen was that output levels will be decided for next year, too. After all, the result of the study of member states’ spare capacity from independent consultants, which is supposed to form the basis of next year’s production levels, will not be available until the end of this month. Yet, a decision has been made for 2025. There is a bounty of angles the impact of the updated production agreement can be looked at and analyzed from: short and long-term effect, whether cohesion within the group prevails, how inventories will be impacted and, the generic question: does the OPEC+ supply management policy work or the group’s relevance in the global oil balance swiftly diminishes?

To start at the end, the supply pact does work. Of course, given that the oil prices are a light year from the desired level and yesterday and this morning’s market reaction might suggest otherwise, the fact of the matter is that nearly 6 mbpd of oil has been taken off the market. It is beyond doubt that prices would be considerably lower without this restraint. The agreement was undeniably complex. It insinuates that reaching it required weeks of behind-the-scenes, sometimes probably heated, negotiations. The framework, which extends cuts into 2025 suggests that the producer group itself is unconvinced of its exceptionally bullish forecast for the second half of the year and for 2025. It will be intriguing to see if OPEC will amend its call on DoC oil in the coming months. Notwithstanding the convolution of the agreement, presenting it was straightforward and even transparent. Of the total 5.86 mbpd, 3.66 mbpd will be kept in place until the end in 2025 and the rest will be rolled back month-by-month starting October.

There were two documents attached to the press releases ensuing the ministerial meeting. The first one lays out the required production levels for 2025. For OPEC members with quotas it will be 24.135 mbpd, for their non-OPEC peers (including Mexico) it will be 15.590 mbpd totaling 39.725 mbpd. The required production level for this year as set out in November 2023 was 23.714 mbpd (adjusted for Angola’s exit from OPEC) and 15.469 mbpd, 39.183 mbpd in total, an increase of less than 600,000 bpd.

The second one was released after the representatives of eight member states met in person in Riyadh to discuss the tapering of the 2.2 mbpd of voluntary cuts. The eight producers, Algeria, Iraq, Kuwait Saudi Arabia, the UAE, Kazakhstan, Oman, and Russia will start phasing out their cuts starting from October this year and will be completely unwound by the end of 3Q 2025. According to the phase out of voluntary cuts, in total 2.464 mbpd will be gradually added back to the market between October 2024 and September 2025, which, in practice, is much less. Consider Russia’s designated production level of 8.978 mbpd for June-September this year, when actual output is currently around 9.3 mbpd whilst Iraq also pumps well over its allowance.

The salient question is what exactly the myriads of these changes, cuts, unwinding, tapering, and phasing out means for the global oil balance and stock movements for the remainder of 2024 and for 2025. The picture is blurred, to put it bluntly. Suppose that OPEC+, inclusive of those with no restrictions, will produce 42 mbpd for the second half of the year. Demand for DoC oil was seen 43.65 mbpd by OPEC and 42.05 mbpd by the IEA. One would envisage stock draws, the other would not. For the whole of 2025 OPEC expects the call on DoC to increase to 43.98 mbpd, the IEA to drop to 41.60 whilst DoC oil production is forecast to climb. 

The planned production levels are not set in stone. Whatever supply-demand data suggests, we suspect that the actual price level will play an equally if not more important part in how to manage OPEC+ supply going forward. There are several headwinds the group will face when it comes to re-introducing barrels to the market. Firstly, compliance. There have been and most plausibly there will be laggards. Secondly, non-DoC+ producers have taken advantage of the OPEC+ discipline and in case prices rise, they will be happy to cash in again, effectively capping any attempts of meaningfully creating a supply deficit. Thirdly, in the past protracted bull runs were triggered by healthy demand and lack of spare capacity. Demand prospects are precarious, the production cushion currently is more than comfortable. Lastly, oil demand. In the words of the Saudi energy minister, Prince Abdulaziz bin Salman ‘we are waiting for interest rates to come down and a better trajectory when it comes to economic growth…’.

The market reaction is depressing to anyone who produces oil and brings elevated joy for consumers. If you compare the price levels at the end of last week to yesterday’s settlement prices it is almost obvious that the announcement of gradual reversal of voluntary cuts was chiefly responsible for letting the bearish genie out of the bottle. It affected sentiment much more adversely than the global oil balance. The latest agreement, however, will make sure that the downside is limited, provided summer demand growth will chip in and help the recovery. The gut reaction to the deal will contribute to moderating global inflationary pressure. The headwinds, outlined above, nonetheless, will ensure that the market will struggle crawl above the annual peak set in April. And the inconceivable Armageddon scenario? A full-blown supply war within the alliance should the expected price reversal fail to materialize.

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