The OPEC+ oil alliance could increase production cuts this weekend

The Organization of the Petroleum Exporting Countries and its allies may extend existing output cuts this week, delegates and analysts told CNBC, even as the focus shifts from Middle East tensions to summer demand.

The group, collectively known as OPEC+, was set to meet in Vienna on June 1, but last week moved the meeting closer to June 2.

OPEC+ producers are currently applying a combined 5.86 million barrels per day to cut supply. Only 2 million barrels per day of the cut represents the same commitment under OPEC group policy, and it expires at the end of this year.

The remainder is reduced voluntarily by a subset of the alliance. The cut of 1.66 million barrels per day is in place until the end of 2024, and 2.2 million barrels per day of supply has been cut by the end of the second quarter. Market participants are watching to see if this latest cut will be extended for another quarter, amid rising demand.

“Come June, China will generally come out of refinery maintenance, US consumption has improved as the heat moves closer, so June should have seen a negative crude balance. Then August is the peak month for tightness,” Viktor Katona, lead crude analyst at Kpler, told CNBC .

The OPEC+ coalition is also seeking compliance with individual members’ quotas, asking overproducers to implement additional cuts. Iraq and Kazakhstan have detailed compensation plans.

Three OPEC+ delegates, who spoke anonymously due to the sensitivity of the discussions, told CNBC the 2.2 million barrels per day supply reduction would be prolonged, with the fourth saying this was the scenario the market was anticipating. One delegate acknowledged the possibility of a tight market in the second half of the year, but noted that demand concerns remain so far.

OPEC’s latest Monthly Oil Market Report in May forecast an increase in demand of 2.25 million barrels per day this year, while the Paris-based International Energy Agency’s Oil Market Report for the same month showed just 1.06 million barrels per day. take a walk

“I think the smart thing for OPEC+ is to gradually reduce voluntary cuts to limit upward price pressure, to prevent inflation from filling in,” Jorge Leon, Rystad Energy’s senior vice president of Oil Market Research, told CNBC. “However, I think that the market is now priced in the full extension of the voluntary cuts. So I think what, probably, they will do.”

He added, “If they decide to fully exceed voluntary cuts, and there is perfect compliance, and they do full compensation, then, if, I think prices can approach $ 100 per barrel this summer.”

Energy security concerns fueled global inflation as Russia’s invasion of Ukraine and more quickly after the conflict in Gaza threatened more spills in the oil-rich Middle East, while frequent maritime attacks by Yemen’s Houthi militants disrupted trade transit in the Red Sea. .

An environment of high inflation and tight monetary policy has dampened demand for oil, but central banks have signaled their readiness to cut interest rates in the second half of the year.

Tamas Varga, an analyst at PVM Oil Associates, told CNBC that the OPEC+ supply limit will remain in place for the third quarter, adding, “I also believe that the group of producers will insist that anyone who does not meet the quota will be dealt with. And I believe that OPEC+ will only ease supply constraints when they see signs of dwindling global oil inventories.

Kpler’s Katona agrees with his views, but notes that heavyweights Saudi Arabia, Russia and the United Arab Emirates, which are involved in voluntary reductions, may seek to remove the final curb by the end of the year.

“Further down to 2025, the inevitable cut may be a challenge for prices as additional production from Guyana, Brazil, Canada will saturate the market,” he said, pointing to new Floating Production Storage and Offloading facilities due to come online. “This year there are no new FPSOs in Guyana, while next year they will start a new one in (third quarter) 2025. Brazil also has one FPSO starting this year and next year will be a new capacity bonanza.”

Rising rival supplies have reduced OPEC+’s market dominance, one OPEC+ delegate admitted, while analysts warned that the group’s ongoing output cuts were allowing unpopular producers to grab market share.

Oil prices have been bullish in the first half of the year, with the threat of a surge from developments in the Middle East. Regional escalation could raise prices with a risk premium of up to $10 per barrel, Rystad’s Jorge Leon noted – while OPEC+ delegates told CNBC that the situation in the Gaza Strip is still adding pressure, but the market has absorbed most of its effects.

It also noted that the Gaza crisis “will last longer than expected, but it has no impression on the coherence and policy of OPEC +.”

One OPEC+ delegate said that the unexpected death of Iranian President Ebrahim Raisi is a tragic accident that cannot be interpreted as a risk for the market, especially since his successor will pursue the same politics.

“I think the geopolitical risk premium has decreased and I think that the tension between Israel and Hamas will only support the price if it will have a clear impact on oil production or oil flows, which could be in the form of closing the Strait of Hormuz, or attacks on oil infrastructure in that area, there’s something we don’t see today,” Varga said.

OPEC+ will also have to balance its relationship with the US, which previously undermined the coalition’s supply cuts amid concerns about gasoline prices. The Biden administration last week said it would release 1 million barrels of gasoline from reserves to curb prices at the pump. The US carried out a similar release of crude oil from its Strategic Petroleum Reserve Stock during the Covid-19 pandemic, but one OPEC+ delegation noted that the measures had no effect beyond the price level during the summer. The US usually seeks to replenish the country’s emergency stockpile of reserves.