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OPEC+ extends production cuts but presents plan to bring barrels back

OPEC+ extended its production cuts as it seeks to shore up a fragile market, but also set a date to begin returning some oil to service later this year.

Sunday’s deal in Riyadh exceeds market expectations in some ways, extending so-called “voluntary” cuts by key members including Saudi Arabia and Russia into next year. However, it also begins reversing these supply cuts in October, earlier than some OPEC observers had assumed.

The agreement suggests that group leader Saudi Arabia, which hosted ministers in its capital after initial plans for a meeting at OPEC headquarters in Vienna were canceled, is trying to strike a balance between competing interests. The agreement aims to continue supporting crude prices while easing production restrictions that some members, such as the United Arab Emirates, chafe at.

“We will maintain our cautious and preventive approach,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after the meeting. This includes the possibility of suspending or even reversing the phasing out of cuts, he said.

Crude prices have fallen recently amid a fragile economic outlook in major consumer China and doubts about the pace of interest rate cuts in major industrialized economies. Brent crude futures settled at $81.62 per barrel on May 31, down 7.1% for the month.

Ahead of the meeting, traders and analysts widely expected OPEC+ to extend its voluntary supply cuts to offset strong production from its rivals, with some predicting they would be maintained until the end of 2024. Under the new agreement, the eight participating countries will have added about 750,000 barrels per day to the market by January.

The deal extends cuts of about 2 million barrels per day that have played a key role in keeping crude prices above $80 a barrel this year but were set to expire at the end of June. The restrictions will continue in full into the third quarter, then be phased out over the following 12 months, according to a statement from the Saudi Energy Ministry.

These “voluntary” cuts by the Organization of the Petroleum Exporting Countries and its allies came on top of a previous group-wide agreement capping crude production at around 39 million barrels per day, in effect until the end of this year. The alliance said in a statement that it had also agreed to extend this agreement until the end of 2025.

Reactions to the deal have been mixed, with some analysts citing the bullish impact of the extension.

“This removes a significant portion of oil from our balance sheets this year and next year,” said Amrita Sen, director of research and co-founder of Energy Aspects Ltd. The deal keeps OPEC+ in charge of the market, she said.

Others expressed concerns about the market’s ability to absorb additional barrels in October.

“We view the meeting as bearish,” analysts at Goldman Sachs Group Inc. said in a note. The detailed plan to reverse further cuts “makes it more difficult to maintain low production if the market proves weaker than OPEC’s bullish expectations.”

If oil prices were to fall further this year, it could improve the economic outlook by providing some relief to central banks struggling with persistent inflation. But it would also threaten the revenues of producers like Saudi Arabia, which needs prices close to $100 a barrel to finance Crown Prince Mohammed bin Salman’s ambitious spending plans, the International Monetary Fund estimates.

Sunday’s deal also resolves, albeit temporarily, a potentially tense debate over some countries’ oil capacity. The alliance had commissioned an external review of its members’ capabilities with the aim of resetting the baseline production levels used to measure reductions in 2025.

Several major exporters were seeking to raise levels, which could pose a risk to the group’s efforts to stabilize global markets. The deadline to complete this process has now been extended by one year to November 2026.

However, the UAE secured a 3,00,000 barrels per day increase in its production target for next year, making it the big winner in Sunday’s talks. The Gulf country has invested heavily in new oil projects in recent years and has sporadically clashed with Riyadh over its production levels, including a confrontation in 2021 that threatened to break up the group.

“This is not about favoring the UAE,” Prince Abdulaziz of Saudi Arabia told reporters after the meeting. This adjustment aligns the proportional reduction for the country with that of other members, he said.

The UAE Minister of Energy said he was satisfied with the result. “We wanted to come together and make a decision that would maintain market balance and give a good idea of ​​what we can expect,” Suhail Al Mazrouei told reporters after the meeting.

To ensure that market conditions remain tight as cuts are phased out, the coalition may also need to ensure that its members fully implement promised cuts.

While some countries, including Saudi Arabia, Kuwait and Algeria, have quickly fulfilled their agreed share, others, such as Iraq, Kazakhstan and Russia, have dragged their feet and continue to collectively pump several hundreds of thousands of barrels per day above their quotas.

All three pledged to improve their performance and make additional “compensation” cuts to compensate for initial overproduction. But their compliance record is spotty.

Iraq has opposed OPEC+ limits for years because it needs revenue to rebuild an economy shattered by war and sanctions, while Russia seeks cash to finance President Vladimir Putin’s war against Ukraine. Kazakhstan, for its part, is eager to deploy new investments in production capacities.

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