The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, are known collectively as OPEC+ and will meet on Sunday, June 2, to discuss their joint oil production policy. However, analysts are not particularly bullish on crude oil prices this year as many believe markets to be oversupplied with OPEC decisions hardly making a difference towards ‘price stability’.
OPEC+ has made a series of cuts since late 2022 amid rising output from the United States and other non-members, and worries over the demand outlook as major economies grapple with high interest rates to tame inflation. The oil-producing group is working on a complex deal to be agreed on Sunday that will allow the group to extend some of its deep oil production cuts into 2025.
Also Read: Built-in capacity to targets: Why OPEC+ members clash over oil production capacity—Explained
The group is currently cutting output by a total of 5.86 million barrels per day (bpd), equal to about 5.7 per cent of global demand. The cuts include 3.66 million bpd by OPEC+ members valid through to the end of 2024, and 2.2 million bpd of voluntary cuts by some members which expire at the end of June.
Despite deep production cuts Brent crude prices are trading near their lowest this year at $81 per barrel, down from a peak of $91 in April, pressured by elevated stocks and concerns over the global demand growth.
The Paris-based watchdog International Energy Agency (IEA) had lowered its forecast for 2024 oil demand growth, widening the gap with OPEC+ in terms of expectations for this year’s global oil demand outlook. The divide between the IEA and OPEC sends divergent signals about the oil market strength in 2024, according to analysts.
The gap between the IEA and OPEC is now even wider than it was earlier this year, when an analysis by news agency Reuters found that the difference of 1.03 million barrels per day (bpd) in February was the biggest since at least 2008.
Ahead of Sunday’s OPEC+ policy meeting, crude oil prices dropped in the previous session and posted a weekly loss as investors awaited the verdict. Brent futures for July delivery settled lower at $81.62 a barrel, while the US West Texas Intermediate (WTI) crude futures fell 1.2 per cent at $76.99.
Several brokerages are predicting that crude oil is likely to remain in the range of $79-$85 till the second quarter of 2024. JP Morgan anticipates Brent crude price to average $84 per barrel in 2024 and $75 per barrel in 2025.
Kaynat Chainwala, AVP-Commodity Research of Kotak Securities in an interview to Mint’s Nikita Prasad, said that OPEC is likely to extend the output cuts till the second half of this year to support prices. The analyst expects crude oil prices in the range of $70-$90 per barrel in 2024 and added that oil has almost given up the geopolitical risk premium over the Middle East conflicts.
Edited excerpts from the interview:
1. The upcoming OPEC and non-OPEC ministerial meeting will be held on June 2, 2024. According to you, what will OPEC+ decide in terms of the global oil output? After the policy decision, what kind of immediate impact do you see on crude oil prices?
OPEC is expected to extend the output cuts into 2H 2024 in an effort to stave off a surplus and support crude prices already contending with fragile Chinese economic outlook and rising non-OPEC supplies. The shift to a virtual meeting indicated that there might be no major policy changes. Markets have already discounted such an outcome and thus don’t see any major impact on prices post the policy.
2. OPEC cartel last extended the voluntary oil output cuts of 2.2 million bpd till mid-2024 to support ‘market stability’. However, oil prices have remained in a consolidation range, with $91/barrel being the highest achieved mark since then. Do you see crude oil prices on an up move in the near term through the Middle East geopolitical risk premium?
Oil prices have given up most of the middle east geo-political risk premium seen in April amid lack of supply disruptions, other than isolated events at the Red sea. Without the disruption of actual barrels of oil, any gains might be capped. The odds of a direct conflict between Iran and Israel or US is also very minimal ahead of the US presidential election in November.
3. Coming to policy changes, high interest rates by central banks have typically weakened oil demand. However, the recent hawkish remarks by the US Federal Reserve policymakers have diminished hopes of early rate cut. With the ongoing geopolitical conflicts, do you think the global supply will be enough for markets if global demand shoots up in late 2024?
Elevated inflation in US and resilience in the economy have prompted Fed officials to be more hawkish this quarter and swaps are now expecting only a single quarter point rate cut this year, during Q4. EIA expects global oil demand to slightly outpace supply this year, leading to a small deficit of around 100 kbpd. Q4 is generally a period of lower demand. Chinese economic recovery will be crucial for oil demand.
4. Finally, what is your 2024 outlook for crude oil prices and how many times will OPEC likely extend the supply curbs this year? When do you see Brent touching $100 per barrel?
OPEC is likely to extend the curbs through the second half of this year and might start unwinding from early 2025. Crude is expected to trade in a range of $70 – $90 per bbl this year, with OPEC keeping a floor under prices. Even though oil demand is expected to see an uptick from June amid the onset of summer driving season in northern hemisphere, we are not expecting any sustained increase in prices above $100 per bbl, amid higher interest rates, Chinese economic uncertainty and US elections.
Overview
OPEC+ crude output represents about 41 per cent of global oil production. The group’s main objective is to regulate the supply of oil to the global market. The leaders are Saudi Arabia and Russia, which produce and nine million and 9.3 million bpd of oil respectively. Angola, which joined OPEC in 2007, quit the bloc at the start of this year, citing disagreements over production levels. Ecuador quit OPEC in 2020 and Qatar in 2019.
OPEC says its member states’ exports account for about 49 per cent of global crude exports. OPEC estimates that its member countries hold about 80 per cent of the world’s proven oil reserves. Because of its large market share, the decisions OPEC makes can affect global oil prices. OPEC+ members meet regularly to decide how much oil to sell on global markets.
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