OPEC Kicks the Can Again

This weekend, OPEC convened its 37th OPEC and non-OPEC Ministerial Meetings (ONOMM). In truth, OPEC meetings have become a bit of a non-event lately, largely because the group has extended existing cuts for the past several meetings, awaiting global demand to firm. The market expectations for this weekend’s meetings were more of the same.

Coming into the meeting, OPEC+ had previously agreed to production cuts of 3.66 million barrels per day (mb/d), which were scheduled to expire at the end of 2024. In addition, a smaller group of eight countries (Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman) agreed to voluntarily cut a further 2.2 mb/d, which was due to expire at the end of June 2024. Based on available data, Russia, Kazakhstan, and Iraq consistently and materially overproduced against their commitments.

The current OPEC+ meeting coincided with Aramco's secondary share sale to the market. The offering consisted of roughly 1.54 billion shares with a value of approximately $12 billion. The secondary represented a small sliver of Aramco - approximately 0.64 percent of the company. Based on news reports, the Aramco offering was oversubscribed, and the company will most likely make available an additional $1 billion for sale as part of the offering. The proceeds of the sales are earmarked for the Kingdom’s Public Investment Fund (PIF) and will support Mohammad bin Salman’s Vision 2023 economic modernisation and the mega project associated with it.

This week's OPEC meeting was virtual, which is a bit unusual. It lasted a total of four hours, which is also unusual. Clearly, much had been decided behind the scenes before the actual meeting. Despite its brevity, the meeting resulted in a fairly complex set of decisions. First, the group decided that the current production cuts of 3.66 mb/d would be extended through the end of 2025. This was widely expected by the market.

Second, the group of eight countries contributing to the voluntary production cuts agreed to continue the current level of cuts through September 2024 and then progressively phase them out over the next year – i.e., September 2025. This was probably not fully anticipated by the market. The group of eight set out a schedule for the phase-out of the production cuts; however, it was clear during the phase-out period that OPEC could make adjustments depending on market conditions.

There were a few other interesting developments that came out of this weekend’s meeting. The new deal included a gradual increase in the UAE’s quote by 300,000 b/d. The rationale behind the increase was that the UAE production capacity was significantly above its current quota level. In addition, the updated determination of each member's capacity targets, which had already been delayed, was pushed to November 2025.

OPEC continues to find itself in a difficult position. Despite deep production cuts, global supply remains effectively sufficient to meet demand. This is due in large part to increased production from the United States, Canada, and Brazil, offsetting the OPEC+ cuts and sluggish global demand growth.

OPEC is basically trapped. It is waiting for global demand to rebound sharply and overwhelm the production increases from non-OPEC countries. With higher interest rates and the uncertainty surrounding of upcoming US elections, it could be waiting some time. Hence, the extended phase-out period for existing cuts. OPEC knows that if it phases out current production cuts without an increase in demand, inventories will expand, and prices will fall. If, however, they can time it right, they might be able to phase out their cuts while the demand is expanding, and prices will remain steady or rise. The latter seems like a rather unlikely scenario.

We do not expect the global markets to react negatively to this weekend’s OPEC news. In essence, the decision once again kicks the can down the road into next year and provides OPEC with a high degree of freedom to adjust its planning should market conditions change. However, with prices hovering in the high 70s and low 80s – these levels will not be welcomed by most OPEC+ members who depend on crude oil revenues to meet their budgetary/spending requirements.