Can Opec+ afford to raise output?

The plan to begin returning oil to the market from October might need to be rethought, write Aydin Calik and Nader Itayim

Falling oil prices are casting doubt on whether Opec+ members will unwind some of their production cuts from October as planned.

Oil prices have fallen by $8-10/bl over the past month, leading observers to question whether the market needs more Opec+ supply. But Opec+ delegates say it is too soon to know whether a change in production policy will be required.

Eight Opec+ members are expected to unwind 2.2mn b/d of voluntary production cuts over a 12-month period starting in October — as agreed in their ministerial meeting in June. This would see the collective output target of these countries increase by a hefty 540,000 b/d by the end of this year and another 1.92mn b/d by September 2025. But it was always made clear that the return of this supply would depend on market conditions. A decision on whether to begin unwinding could come in early September, leaving several weeks for Opec+ to monitor market developments.

Will markets recover by then? The recent slide in oil prices is an overreaction to weaker-than-expected jobs data in the US and a return to $80/bl is already under way, one Opec+ delegate says. The jobs data stoked fears that the world could be headed for a US-led global recession, prompting a sharp sell-off in commodities and global equities. Another delegate insists that the weakening of oil prices was neither reflective of supply and demand fundamentals nor of elevated geopolitical risks. They also say they expect prices to strengthen in the next few weeks, noting a recent rebound in financial markets.

For now, there is an expectation among delegates that the eight Opec+ members will adhere to their plan to unwind supply cuts, particularly given their view that oil market physical fundamentals remain strong. But even if the expected demand surge in the second half of the year does not materialise, any move to delay the plan might still receive pushback from some members that are eager to return output. The Opec+ deal in June was a compromise between members that argued cuts had gone on too long and those that stressed the need to keep production in check. But if oil prices continue to slide, it is possible that the group of eight will alter the plan, a delegate says. This could take the shape of a pause, as ministers have previously suggested, or potentially even a slowdown of the return, meaning less oil would start to come back to the market in October than originally planned.

Output at three-year low

The recent slide in oil prices comes despite a series of output cuts by Opec+ that have removed 3.65mn b/d from the market since October 2022, Argus estimates. Production by members subject to cuts fell for a fourth straight month in July as serial overproducer Kazakhstan finally made good on its promise to reduce output. The group's production fell by 50,000 b/d to 33.89mn b/d, the lowest since May 2021 and exceedingly close to its 33.85mn b/d target. Within the group, the nine Opec members subject to cuts were 220,000 b/d above their target in July, while the nine non-Opec members were 180,000 b/d below.

Output in July could have been lower still. Iraq's production increased by 50,000 b/d to 4.25mn b/d — 250,000 b/d above its formal output target and 320,000 b/d above its effective target under its plan to compensate for overproducing in the first half of the year. Russia — which is not due to begin its compensation cuts until October — reduced output by 30,000 b/d to 9.05mn b/d but remained 70,000 b/d above target. Moscow blames this on "problems with the supply schedule". Kazakhstan drove down production by 80,000 b/d to 1.46mn b/d, which was 10,000 b/d below its formal target but still 10,000 b/d above its effective target based on its compensation plan.