OPEC+ agreed on Sunday to extend most of its significant oil output cuts well into 2025 to stabilize the market amid slow demand growth, high interest rates, and increasing U.S. production.
Recently, Brent crude oil prices have hovered around $80 per barrel, which is below the level many OPEC+ members require to balance their budgets.
Concerns over slow demand growth in China, the top oil importer, and rising oil stocks in developed economies have also pressured prices.
The Organization of the Petroleum Exporting Countries and its allies, led by Russia, collectively known as OPEC+, have implemented substantial output cuts since late 2022.
Currently, OPEC+ members are reducing output by a total of 5.86 million barrels per day (bpd), about 5.7% of global demand.
This includes 3.66 million bpd of cuts set to expire at the end of 2024, and voluntary cuts of 2.2 million bpd by eight members, expiring at the end of June 2024.
On Sunday, OPEC+ decided to extend the 3.66 million bpd cuts until the end of 2025 and prolong the 2.2 million bpd cuts by three months, until the end of September 2024.
These voluntary cuts will be gradually phased out from October 2024 to September 2025.
Saudi Energy Minister Prince Abdulaziz bin Salman said, “We are waiting for interest rates to come down and a better trajectory when it comes to economic growth … not pockets of growth here and there.”
OPEC expects demand for OPEC+ crude to average 43.65 million bpd in the second half of 2024, implying a stock drawdown of 2.63 million bpd if the group maintains output at April’s rate of 41.02 million bpd.
The drawdown will decrease as OPEC+ starts phasing out the 2.2 million bpd voluntary cuts in October.
The International Energy Agency estimates that demand for OPEC+ oil plus stocks will average 41.9 million bpd in 2024.
“The deal should allay market fears of OPEC+ adding back barrels at a time when demand concerns are still rife,” said Amrita Sen, co-founder of Energy Aspects think tank.
Prince Abdulaziz mentioned that OPEC+ could pause or reverse the unwinding of cuts if demand isn’t strong enough.
Analysts expected OPEC+ to extend voluntary cuts due to falling oil prices and weak demand, but many also anticipated difficulties in setting targets for 2025 due to unresolved individual capacity targets.
The UAE has been pushing for a higher production quota, arguing its capacity figure was underestimated.
In a surprise move, OPEC+ postponed discussions on capacities until November 2025 and set a new output target for the UAE, allowing it to gradually increase production by 0.3 million bpd from the current level of 2.9 million bpd.
Prince Abdulaziz cited difficulties for independent consultants in assessing Russian data due to Western sanctions on Moscow for its war on Ukraine as a reason for the delay.
Sunday’s meetings lasted less than four hours, unusually short for such a complex deal. OPEC+ sources revealed that Prince Abdulaziz had spent days preparing the deal behind the scenes and invited key ministers to Riyadh for discussions.
The countries that have made voluntary cuts are Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia, and the UAE.
“It should be seen as a huge victory of solidarity for the group and Prince Abdulaziz,” said Sen, noting that the deal would ease fears of Saudi Arabia adding barrels back due to Aramco’s share listing.
Saudi Arabia’s government has filed papers to sell a new stake in state oil giant Aramco, potentially raising up to $13.1 billion to fund Crown Prince Mohammed bin Salman’s plan to diversify the economy. OPEC+ will hold its next meeting on December 1, 2024.