US crude oil falls more than 3% as OPEC+ plans to phase out its production cuts

The OPEC logo on the Organization of the Petroleum Exporting Countries building.

Thomas Coex | Afp | Getty Images

U.S. crude oil fell more than 3% on Monday as OPEC+ announced plans to phase out voluntary production cuts totaling 2.2 million barrels per day.

A coalition of eight OPEC+ members led by Saudi Arabia and Russia announced on Sunday that it would begin phasing out these cuts over a 12-month period starting in October.

The planned phase-out, however, will be subject to market conditions and could be canceled, producers said. OPEC+ is keeping in place separate tranches of production cuts totaling 3.6 million bpd until the end of 2025.

Here are today’s energy prices:

  • West Texas Intermediate July contract: $74.51 per barrel, down $2.44 or 3.2%. Since the start of the year, US crude oil has gained 3.7%.
  • Brent August contract: $78.69 per barrel, down $2.40 or 3% Year to date, the global benchmark has gained 1.9%.
  • July RBOB Gasoline contract: $2.35 per gallon, down 2.7%. Year to date, gasoline futures are up 11.6%.
  • Natural gas July contract: $2.69 per thousand cubic feet, up 3.9%. Since the start of the year, gas is up 6.00%.

“Some people have read the OPEC statement, particularly the part about adding barrels following the voluntary reduction, as bearish,” said Helima Croft, head of global commodities strategy at RBC Financial Markets. Capital.

“They made it clear that it would depend on the data,” Croft said. “As we get to the end of August, if the fundamental situation looks worse than what we have now, they would suspend this addition.”

Under this plan, more than 500,000 b/d would return to the market by December and 1.8 million b/d by June 2025.

Bob Yawger, futures analyst at Mizuho, ​​said the market structure was weakening. The OPEC+ announcement will make traders reluctant to buy oil for delivery later this year due to concerns that prices will fall as supply returns to the market, he said.

“Who’s going to step in and buy the back of the curve now?” » asked Yawger. “No one, because they could put barrels back on the market. No one will buy in November, no one will buy in December. This will kill the December 2024 contract,” he said.

Andrew Lipow, president of Lipow Oil Associates, said the move would limit the rise in crude prices. The production countries plan to add to the market from October 2024 to September 2025 is equivalent to OPEC’s demand growth forecast of 2.2 million bpd for this year, Lipow said.

“In essence, the volume they are putting back into the market is equal to the optimistic demand growth forecasts released by OPEC for 2024,” Lipow said. “And the result is that they add enough supply to meet the expected growth in the market.”

OPEC+ faces a dilemma in which member states’ budgets are under pressure due to low oil prices, but at the same time they have to worry that rising oil prices will harm demands and pushes crude prices even lower than they want, Lipow said.

“They’re kind of stuck in a box,” Lipow said of the challenge the cartel faces. Although OPEC+ faces challenges, the group has managed to keep prices high by making cuts of some 6 million bpd since October 2022, Lipow said. Oil prices would be considerably lower, probably in the $50 per barrel range, in the absence of these cuts, he said.

Yawger said the prospect of $100 a barrel oil is no longer likely unless a geopolitical crisis causes a “total disaster” situation in the Persian Gulf or Arabian Peninsula.

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