OPEC+ has decided to delay its planned production increase by one month, marking the second postponement in its strategy to boost supply amidst challenging economic conditions. The alliance, led by Saudi Arabia and Russia, initially intended to commence monthly production hikes by adding 180,000 barrels per day starting in December. However, they will now maintain restricted supply through that month, as indicated by a statement released on OPEC’s website on Sunday.
Originally, OPEC+ had deferred the production increase set for October due to weakened demand in China and rising supplies from the Americas affecting prices. Brent crude futures have dropped by 17% over the past four months, settling around $73 per barrel, a price level insufficient for Saudi Arabia and many OPEC+ members to meet government expenditure needs.
Harry Tchilinguirian, head of oil research at Onyx Commodities Ltd., remarked that market conditions have influenced OPEC+’s decision, which aligns with the current macroeconomic realities focusing on China and Europe, suggesting a slowdown in oil demand growth.
The further delay in production increase might have minimal impact on the market as it was anticipated by many traders. Despite the OPEC+ coalition’s decision to refrain from heightening supplies, the International Energy Agency in Paris predicts a global surplus in the coming year. Citigroup Inc. and JPMorgan Chase & Co. foresee prices potentially slipping into the $60 range by 2025.
According to Giovanni Staunovo, an analyst at UBS Group AG in Zurich, the move by OPEC+ is seen as “modestly positive.” Staunovo also noted that market attention will likely shift towards Iran’s response to Israel’s attacks and the outcome of US elections.
Crude markets have largely dismissed a year of conflict in the Middle East, including recent retaliations by Israel against Iran, with traders increasingly confident that oil shipments from the region will remain stable.
This situation poses a financial challenge for Riyadh, as the kingdom requires oil prices near $100 per barrel to fund the ambitious economic plans of Crown Prince Mohammed bin Salman, as per the International Monetary Fund. Furthermore, Russian President Vladimir Putin, Saudi Arabia’s oil-market ally, also requires financial resources for the ongoing conflict in Ukraine.
Amrita Sen, director of research at Energy Aspects Ltd., pointed out that the impact on market sentiment is more significant than the numbers. Sen indicated that the market has misjudged OPEC+ as aiming to flood the market to regain share, whereas their primary goal is to manage oil inventories effectively.
Earlier in June, the Organization of the Petroleum Exporting Countries and its allies set forth a plan to gradually reinstate 2.2 million barrels per day of production, which had been halted over the last two years. Nevertheless, deteriorating fundamentals have disturbed these plans, with demand in China contracting over four months and increases in supply from the US, Brazil, Canada, and Guyana. US oil production achieved a record 13.4 million barrels per day in August.
Jorge Leon, senior vice president at Rystad Energy AS, suggested that given geopolitical tensions in the Middle East and the forthcoming US presidential elections, it appears logical for OPEC+ to extend the voluntary production cuts for an extra month.
OPEC+ has encountered challenges in ensuring compliance among some members, particularly Russia, Iraq, and Kazakhstan, with these countries often exceeding agreed production limits. They have vowed to improve compliance and impose additional cuts to offset overproduction.
The 23-nation coalition is scheduled to meet on December 1 to assess its policy for 2025.
