OPEC+ Expected to Extend Oil Production Cuts into Next Quarter
OPEC+ is anticipated to prolong its current oil production cuts into the next quarter to prevent a surplus and bolster prices. Saudi Arabia and its partners are set to decide early next month whether to extend approximately 2 million barrels per day (MMbpd) of curbs beyond March. With global demand growth slowing and U.S. crude production rising, OPEC+ may need to persist with the cuts, according to a Bloomberg survey.
Several delegates from OPEC and its allies have privately predicted an extension, which Riyadh has indicated is manageable. “They’ll have to extend their cuts,” said Bob McNally, president of consultants Rapidan Energy Group and a former White House official. “Supply is exceeding demand, and to keep prices stable, OPEC+ has to keep that oil off the market.”
Oil prices have hovered around $80 a barrel this year as increased supplies from the U.S. and other producers offset both the OPEC+ cuts and concerns that Middle East conflict could disrupt crude shipments. While subdued fuel prices could offer relief to major consuming nations like the U.S. and central banks wary of persistent inflation, these levels are slightly too low for many OPEC+ members.
Riyadh requires a price above $90 a barrel as it invests billions in an economic transformation that includes futuristic cities and sports tournaments, according to Fitch Ratings. Its alliance partner, Russian President Vladimir Putin, also seeks revenues to continue the conflict in Ukraine.
Global oil markets are in surplus, and the overhang would significantly expand if the 22-nation OPEC+ bloc were to restore production, the International Energy Agency (IEA) in Paris stated in a report last week. While global oil demand is expected to reach a new record of 103 million barrels a day this year, the pace of growth is slowing sharply, according to the IEA. Consumption will be easily matched by a flood of supplies from the U.S., Brazil, Canada, and Guyana, it forecasts.
Meanwhile, China, which has driven demand growth for two decades, has slipped into deflation and faces a host of economic challenges in its property and shadow banking sectors.
Fourteen of 17 traders and analysts in the anonymous survey predicted that OPEC+ will maintain its oil production curbs, while the three others forecast that they would be gradually eased. Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg in December that the measures can “absolutely” be extended.
“OPEC+ has no choice but to extend the current cuts to avoid a meltdown,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd.
Other analysts see less pressure on the producers, as price differentials for physical crude cargoes strengthen and robust travel in China over the Lunar New Year holiday points to an increase in consumer spending.
“The physical markets are telling us that actually markets have tightened,” said Amrita Sen, director of research at consultants Energy Aspects Ltd. “We do believe that OPEC+ will extend its cuts in some form,” and then “the surplus does go away.”
In addition to extending the curbs, OPEC+ may need to enhance their implementation following a slow start in January. While Kuwait and Algeria promptly delivered their agreed reductions, Iraq and Kazakhstan, which have a patchy track record on compliance, remained several hundred thousand barrels a day above their quotas. The two countries have pledged to improve their performance.
OPEC+ has not scheduled a formal meeting to review the extension, which member governments would likely announce in separate statements on state-run media. The group’s next ministerial conference is set for June 1 at its headquarters in Vienna.
Source: Bloomberg
