OPEC+ oil alliance could extend production cuts this weekend

The Organization of the Petroleum Exporting Countries and its allies could extend existing production cuts this week, delegates and analysts told CNBC, even as attention turns from tensions in the Middle East to summer demand.

The group, collectively known as OPEC+, was scheduled to meet in person in Vienna on June 1, but last week the meeting was virtually postponed until June 2.

OPEC+ producers are currently implementing combined supply cuts of 5.86 million barrels per day. Just 2 million barrels per day of these reductions represent unanimous commitments under the OPEC group’s policy and expire at the end of this year.

The rest is reduced voluntarily by a subset of the alliance. A reduction of 1.66 million barrels per barrel is in place through the end of 2024, and 2.2 million barrels per day of supply have been reduced through the end of the second quarter. Market participants expect this latest reduction to be extended for another quarter, amid an expected increase in demand.

“In June, China will no longer need to maintain its refineries, US consumption is improving as summer approaches, so June should already see negative crude balances. And then August is the peak month on tightening,” Viktor Katona, senior crude analyst at Kpler. , told CNBC.

The OPEC+ coalition also ensures that each of its members respect quotas, asking overproducers to implement additional reductions. Iraq and Kazakhstan have detailed compensation plans.

Three OPEC+ delegates, who spoke anonymously due to the sensitivity of the negotiations, told CNBC that supply cuts of 2.2 million barrels per day would likely be extended, with a fourth saying it was the scenario anticipated by the market. One delegate acknowledged the likely market tightness in the second half of the year, but noted that concerns about demand persisted until recently.

OPEC’s latest monthly oil market report from May forecasts an increase in demand of 2.25 million barrels per day this year, while the International Energy Agency’s oil market report, based in Paris, from the same month, indicates a demand of only 1.06 million barrels per day. hiking.

“I think the smart thing for OPEC+ would be to gradually roll back voluntary cuts to limit upward pressure on prices and prevent further inflation,” Jorge Leon, senior vice president of research, told CNBC in the Rystad Energy oil market. “However, I think the market has now priced in a full extension of voluntary reductions. So I think that’s probably what they will do.”

He added: “If they decide to fully extend the voluntary reductions, and compliance with the rules is perfect, and they do full compensation, and then, if, I think the prices could reach more than 100 dollars a barrel this summer.”

Energy security concerns fueled global inflation following Russia’s invasion of Ukraine and were further stoked after the conflict in Gaza threatened to have wider spillover effects across the Middle East. -Oil-rich East, while frequent maritime attacks by Yemen’s Houthi militants have disrupted commercial transit in the Red Sea. .

A high inflation environment and tight monetary policy have in turn dampened oil demand, but central banks have signaled they are prepared to cut interest rates in the second half of the year.

Tamas Varga, an analyst at PVM Oil Associates, told CNBC that OPEC+ supply restrictions will likely remain in place in the third quarter, adding: “I also think the producers group will point out that anyone who has not complied the quota will have to And I believe that OPEC+ will only ease supply constraints when it sees clear signs of depletion of global oil stocks. »

Kpler’s Katona agrees, but notes that heavyweights Saudi Arabia, Russia and the United Arab Emirates, which are participating in the voluntary reductions, could seek to remove these latest restrictions by the end of the year.

“Later, until 2025, reversing the cuts could prove difficult for prices, as additional production from Guyana, Brazil and Canada will saturate the markets,” he said, signaling the commissioning of new floating production storage and unloading facilities. “This year, there is no new FPSO in Guyana, while next year, a new FPSO will start up in (third quarter) 2025. Brazil, similarly, has one FPSO starting this year, while that next year will be a boon of new capabilities. “

Rising competing supplies have reduced OPEC+’s importance in the market, an OPEC+ delegate acknowledged, while analysts signaled that the group’s ongoing production cuts allow unfettered producers to conquer their market share.

Oil prices remained largely range-bound in the first half, under constant threat of spikes linked to developments in the Middle East. Regional escalations could push prices higher with a risk premium of up to $10 a barrel, Rystad’s Jorge Leon noted – while OPEC+ delegates told CNBC that the situation in the Gaza Strip adds yet another little pressure, but the market has already absorbed the majority of prices. its effect.

Katona also noted that the Gaza crisis “will apparently persist longer than expected, but it does not really have an imprint on the coherence and policy of OPEC+.”

An OPEC+ delegate, meanwhile, said the unexpected death of Iranian President Ebrahim Raisi represented a tragic accident that could not be interpreted as a risk to the market, especially since his successor will likely continue a similar policy.

“I think the geopolitical risk premium has eased and tensions between Israel and Hamas will only support prices if they have a clear impact on oil production or flows, which could take the form of shutting down of the Strait of Hormuz, or attacks on oil infrastructure in the region, which does not seem plausible at the moment,” Varga said.

OPEC+ must also balance its relationship with the United States, which has previously lambasted the coalition’s supply cuts over concerns about gasoline prices. The Biden administration announced last week that it would release 1 million barrels of gasoline from reserves in an effort to reduce prices at the pump. The United States has undertaken similar releases of crude from its strategic oil reserve stocks during the Covid-19 pandemic, but an OPEC+ delegate noted that such measures are unlikely to have any impact. impact beyond the drop in prices over the summer. The United States generally seeks to replenish the emergency stock of its state reserves.