Demand uncertainty clouds Opec+ output decision

Opec+ officials are arriving in Vienna ahead of this weekend's ministerial meeting, with mixed views among delegates about whether the group should stick with existing crude production pledges or make deeper cuts. The prospects for global demand look likely to dominate discussions.

Earlier in the week, some delegates suggested no change as the most likely outcome. "Everybody seems aligned at this point on a rollover — keeping production at May levels for July and beyond," one said.

Another delegate said it would be "too soon" to introduce another round of cuts ꟷ either voluntary or changes to formal quotas ꟷ given the last round of reductions only took effect in May. "Announcing another cut so quickly after the first could be chaotic," the delegate said.

But as the meeting draws closer, consensus on staying the course appears to be weakening, with one delegate telling Argus today that it is "a 50:50 situation for Opec at the moment". The group either rolls over and accepts an estimated decline in oil prices of around $5/bl while it waits for oil demand to pick up later in the year, or it takes a decision to support the market now, the delegate said.

Much has been made of the unpredictability of the oil market in the run-up to the meeting, particularly with regard to the strength of demand. Oil demand "depends on so many economic factors," UAE energy minister Suhail al-Mazrouei said last month. "It is not a straightforward equation to describe… it is not easy."

This is highlighted by diverging outlooks for oil demand from some of the most prominent forecasting agencies. Opec itself predicts strong demand growth of 2.33mn b/d this year, and the IEA last month revised up its 2023 growth estimate by almost 200,000 b/d to 2.21mn b/d. But the US EIA forecasts a more modest 1.57mn b/d, and Argus Consulting puts it at 1.74mn b/d. Where these outlooks appear to converge is in their views that much of the year-on-year growth will come in the second half of 2023, bringing with it a tightening market balance.

Analysts also point to oil inventory draws, which look likely to continue well into the second half of this year, but fears of a US recession and disappointing economic indicators in China remain at the forefront of delegates' minds.

On paper, the Opec+ coalition has yet to formally deviate from the policy it announced in October to cut its overall crude output quota by 2mn b/d from November until the end of this year. But eight of the group's members surprised the market in April by announcing an additional 1.16mn b/d cut from May. That came on top of Russia's unilateral 500,000 b/d reduction pledge. The rise in crude prices that followed the April announcement has since been entirely erased.

By Nader Itayim, Bachar Halabi and James Keates