Adds details throughout
Opec+ agreed a multi-layered deal today that will extend all of its existing crude production cuts into next year but, crucially, could also see the group start to unwind some of them.
In a series of meetings today, Opec+ ministers made decisions related to three separate sets of production cuts. The first extends the alliance's formal crude production targets until the end of next year, which include cuts worth around 2mn b/d agreed in October 2022.
The second relates to 1.66mn b/d of "voluntary" cuts agreed by nine members of the group in the first half of 2023, which had been due to run until the end of this year but have now also been extended until the end of 2025.
The third relates to 2.2mn b/d of voluntary cuts announced by eight members between June and November last year and were due to run until the end of this month. These will now be prolonged for another three months until the end of September, after which there is a plan to phase them out in stages over a 12-month period.
The return of this third set of voluntary cuts is not a foregone conclusion. The group noted that unwinding the cuts could be paused or reversed subject to market conditions.
"We maintain the choice that we could pause or could reverse. This is not new, we've been doing it over the last three years and I think it has proven to be effective," Saudi energy minister Prince Abdulaziz bin Salman said following the announcement of the deal.
The voluntary cuts are only being implemented by some members of Opec+ and fall outside of the group's formal production quotas. They were designed to allow for flexibility and to maintain cohesiveness among the alliance given that some members were already producing well below their official quotas.
Should these cuts be unwound as currently scheduled, the collective target of members bound by production commitments would increase by about 540,000 b/d from now to 34.4mn b/d by the end of this year, according to Argus calculations. And by September 2025, the deal implies another rise of 1.92mn b/d to the group's collective target to 36.3mn b/d. Production by members adhering to output targets stood at 34.185mn b/d in April, according to an average of secondary sources that include Argus.
Actual targets will be lower, at least over the next few months, given that Iraq and Kazakhstan have vowed to compensate for overproducing in the first four months of this year. Russia, which notably overproduced in April, is expected to submit a compensation plan as well, according to Prince Abdulaziz.
Today's meetings also resulted in the UAE securing another upgrade to its official production quota, this time by 300,000 b/d. It comes after a previous upwards adjustment of 200,000 b/d came into effect from January 2024. The UAE's new official quota will be gradually phased in starting in January and stand at 3.519mn b/d by September 2025.
Another key headline from the Opec+ meetings relates to each individual member's official crude production capacity, from which output quotas are typically calculated. The alliance extended the assessment period allotted to three "independent sources" carrying out capacity evaluations to November 2025 and said new capacities would not come into effect until 2026 — one year behind schedule.
Differing views
The deal also reflects an attempt to reconcile differing viewpoints within the coalition, with some members stressing the need to keep output in check and others adamant they want to see some output restored.
This divergence partly reflects uncertainty over the scale of oil demand growth in the next 18 months. The IEA sees oil demand growing by 1.06mn b/d this year and by another 1.18mn b/d in 2025, while Opec is far more bullish, forecasting a 2.25mn b/d increase in 2024 followed by a rise of 1.85mn b/d next year.
The latest agreement appears designed to hand the group flexibility given the uncertainties related to supply-demand balances as well as the macroeconomic outlook.
"We're waiting for interest rates to come down. Better trajectory when it comes to economic growth, global growth, not pockets of growth here and there. More certainty on the overall economic trajectory. That will probably cause demand to increase with a clear path," Prince Abdulaziz said.
The uncertainty, coupled with geopolitical tensions, has contributed to erratic movement in oil prices over the past couple of months. Ice Brent futures breached the $90/bl mark in early April, up more than 10pc on the month, only to shed most of those gains in the weeks that followed. The front-month Ice Brent contract has been oscillating between $82/bl and $84/bl since the middle of May.
