OPEC+ extends deep oil production cuts until 2025

LONDON/DUBAI:

OPEC+ agreed on Sunday to extend most of its deep oil output cuts until 2025 as the group seeks to prop up the market amid tepid demand growth, high interest rates and rising rival U.S. output.

Brent crude oil prices have been trading near $80 a barrel in recent days, below what many OPEC+ members need to balance their budgets. Concerns about slow demand growth in top oil importer China have weighed on prices alongside a rise in oil inventories in advanced economies.

The Organization of the Petroleum Exporting Countries and its Russia-led allies, collectively known as OPEC+, have made a series of deep output cuts starting in late 2022.

OPEC+ members are currently cutting production by 5.86 million barrels per day (bpd), or about 5.7% of global demand.

These include cuts of 3.66 million bpd, which were due to expire at the end of 2024, and voluntary cuts by eight members of 2.2 million bpd, which expire at the end of June 2024.

On Sunday, OPEC+ agreed to extend cuts of 3.66 million bpd by one year to the end of 2025 and to extend cuts of 2.2 million bpd by three months to the end of September 2024.

OPEC+ will phase out cuts by 2.2 million bpd over a year from October 2024 to September 2025.

“We expect interest rates to come down and a better trajectory in terms of economic growth … not pockets of growth here and there,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters.

OPEC expects demand for OPEC+ crude to average 43.65 million bpd in the second half of 2024, suggesting a 2.63 million bpd decline in inventories if the group maintains output at April’s 41.02 million bpd.

The drawdown will be smaller when OPEC+ begins phasing out voluntary cuts of 2.2 million bpd in October.

The International Energy Agency, which represents top global consumers, estimates that demand for OPEC+ oil plus reserves will average a much lower level of 41.9 million bpd in 2024.

“The agreement should allay market fears that OPEC+ will add back barrels at a time when demand concerns remain high,” said Amrita Sen, co-founder of think tank Energy Aspects.

Prince Abdulaziz said OPEC+ could halt the easing of cuts or reverse them if demand was not strong enough.

Analysts had expected OPEC+ to extend the voluntary cuts by several months due to falling oil prices and subdued demand.

But many analysts had also predicted the group would struggle to set targets for 2025 as it had yet to agree individual capacity targets for each member, an issue that had previously created tensions.

The United Arab Emirates, for example, is pushing for a higher production quota, arguing that its capacity has long been underestimated.

But in a surprise development on Sunday, OPEC+ postponed capacity talks until November 2025 from this year.

Instead, the group agreed a new output target for the UAE, which will see it gradually increase output by 0.3 million bpd, from the current level of 2.9 million.

OPEC+ has agreed it will use independently assessed capacity figures as guidance for 2026 output instead of 2025 – postponing a potentially difficult debate by a year.

Prince Abdulaziz said one of the reasons for the delay was difficulties for independent advisers to assess Russian data amid Western sanctions on Moscow over the war in Ukraine.

The meetings on Sunday lasted less than four hours – relatively short for such a complex deal.

OPEC+ sources said Prince Abdulaziz, the most influential minister in the OPEC group, had spent days preparing the deal behind the scenes.

He invited some key ministers – mainly those who contributed to the voluntary cuts – to come to the Saudi capital of Riyadh on Sunday, although the meetings were largely scheduled online.

Countries that have made voluntary production cuts include Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia and the United Arab Emirates.

“It should be seen as a huge solidarity victory for the group and Prince Abdulaziz,” Sen said, adding that the deal would ease fears that Saudi Arabia would bring back barrels because of the Aramco share listing.

Saudi Arabia’s government has filed papers to sell a new stake in state oil giant Aramco that could raise up to $13.1 billion, a landmark deal to help finance Crown Prince Mohammed bin Salman’s plan to diversify economy..

OPEC+ will hold its next meeting on December 1, 2024.