OPEC logo on the OPEC building.
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Oil-producing Organization of the Petroleum Exporting Countries and its allies are likely to extend existing production cuts this week, representatives and analysts told CNBC, even as the focus shifts from Middle East tensions to summer demand.
The group, known collectively as OPEC+, was originally scheduled to meet in Vienna on June 1, but last week actually postponed the meeting to June 2.
OPEC+ oil-producing countries currently implement a total of 5.86 million barrels per day of production cuts. Only 2 million barrels per day of the cuts represent a unanimous commitment under OPEC group policy and are due to expire at the end of this year.
The remainder is voluntarily reduced by part of the alliance. At the end of 2024, production will be reduced by 1.66 million barrels per barrel, and by the end of the second quarter, supply will be reduced by 2.2 million barrels per day. Market participants are watching whether the latter price cut will be extended for another quarter amid expectations of increased demand.
Viktor Katona, chief crude oil analyst at Kpler, said: “By June, China will basically stop refinery maintenance, and as summer approaches, U.S. consumption is improving, so June should already have a negative crude oil balance. Then August is the peak month of stress.
The OPEC+ alliance also pays attention to the quota compliance of individual member countries and requires countries with overproduction to implement additional production cuts. Iraq and Kazakhstan have detailed compensation plans.
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Three OPEC+ representatives, who spoke on condition of anonymity due to the sensitivity of the negotiations, told CNBC that the planned 2.2 million barrels per day production cut could be extended, with a fourth saying that was what the market expected. A representative acknowledged that the market may be tight in the second half of the year, but noted that demand concerns have persisted until recently.
OPEC’s latest oil market report for May expected demand to increase by 2.25 million barrels per day this year, while the Paris-based International Energy Agency’s oil market report for the same month pointed to a rise of only 1.06 million barrels per day.
Jorge Leon, senior vice president of oil market research at Rystad Energy, told CNBC: “I think it would be wise for OPEC+ to gradually lift the voluntary production cuts to limit upward pressure on prices and prevent inflation from rising again. “However, I think the market A full extension of voluntary production cuts has now been priced in. So I think they might do that. “
He added, “If they decide to fully extend the voluntary production cuts, and they fully comply with the rules, and they fully compensate, then, if, I think oil prices could be close to $100 a barrel this summer.”
Energy security concerns have fueled global inflation after Russia’s invasion of Ukraine, with conflict in Gaza threatening wider spillovers across the oil-rich Middle East and further fueled by frequent maritime attacks by Yemen’s Houthi rebels disrupting trade shipments in the Red Sea. Energy security concerns.
A high-inflationary environment and tight monetary policy have in turn suppressed oil demand, but central banks have signaled their readiness to lower interest rates in the second half of the year.
PVM Oil Associates analyst Tamas Varga told CNBC that OPEC+ supply constraints are likely to remain in place in the third quarter, adding: “I also think the producer group will emphasize that anyone who doesn’t comply with the quota will have to It is believed that OPEC+ will ease supply constraints only if it sees clear signs of depletion of global oil inventories.
Kepler’s Katona agreed, but noted that Saudi Arabia, Russia and the United Arab Emirates, the heavyweights involved in the voluntary cuts, may seek to lift the latter restrictions before the end of the year.
“By 2025, as increased production from Guyana, Brazil, and Canada will saturate the market, the end of production cuts may pose a challenge to prices,” he said. He also said that new floating production, storage and offloading facilities are about to come online. “There are no new FPSOs in Guyana this year and next year it will [third-quarter] 2025.
An OPEC+ representative acknowledged that increased competitive supply had reduced OPEC+’s market position, while analysts said the group’s ongoing production cuts allowed unfettered producers to capture market share.
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Oil prices have been largely range-bound in the first half of the year amid continued threats from developments in the Middle East. Rystad’s Jorge Leon noted that escalating tensions in the region could lead to higher prices, with risk premiums as high as $10 a barrel, while OPEC+ representatives told CNBC that the situation in Gaza is still adding a little pressure, but the market has absorbed most of the pressure. .
Katona similarly noted that the Gaza crisis “seems like it will last longer than everyone expected, but it has not really had an impact on OPEC+ coherence and policy.”
Meanwhile, OPEC+ representatives said the unexpected death of Iranian President Ibrahim Raisi was a tragic accident and cannot be interpreted as a risk to markets, especially given that his successor may pursue similar politics.
“I think the geopolitical risk premium has subsided, and I think tensions between Israel and Hamas will only support prices if there is a clear impact on oil production or oil flows, which could be in the form of closing the Israeli strait Appear.
OPEC+ also must balance its relationship with the United States, which has previously criticized the alliance’s production cuts over concerns about gasoline prices. The Biden administration said last week it would release 1 million barrels of gasoline from reserves to keep a lid on gasoline prices. The United States has also released similar crude oil from its Strategic Petroleum Reserve stocks during the Covid-19 pandemic, but an OPEC+ representative noted that these measures were unlikely to have an impact beyond summer price relief. The United States typically seeks to replenish its national stockpile of emergency reserves.
