ORGANIZATION of the Petroleum Exporting Countries Plus (Opec+) agreed to push back its December production increase by one month, the second delay to its plans to revive supply as prices continue to struggle amid a fragile economic outlook.
The group led by Saudi Arabia and Russia had intended to begin a series of monthly production increases by adding 180,000 barrels a day from December, but they will now keep supply restrained through that month, according to a statement posted on Opec’s website on Sunday (Nov 3).
They had already postponed the restart from October as faltering demand in China and swelling supplies from the Americas pressure prices. Brent futures have slumped 17 per cent in the past four months to trade near US$73 a barrel, too low for the Saudis and many others in Opec+ to cover government spending.
“Market conditions won out,” said Harry Tchilinguirian, head of oil research at Onyx Commodities. “Opec+ showed it could not ignore the current macroeconomic economic realities centred on China and Europe, which point to weaker oil demand growth.”
Further delay may do little to bolster the market, having been anticipated by many traders. Global markets still face a glut next year even if the Opec+ alliance refrains from increasing supplies, the International Energy Agency in Paris estimates. Citigroup and JPMorgan see prices slipping into the US$60s in 2025.
The Opec+ move is “modestly positive”, said Giovanni Staunovo, an analyst at UBS Group in Zurich. The market will focus instead on Iran’s response to Israel’s attacks and the outcome of US elections, he said.
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Crude markets have largely shrugged off a year of conflict in the Middle East, including Israel’s recent retaliatory strike against Iran, as traders grow increasingly confident that oil shipments from the region will remain unaffected.
That poses a financial threat for Riyadh, which needs price levels closer to US$100 a barrel to cover the ambitious economic plans of Crown Prince Mohammed bin Salman, according to the International Monetary Fund. The kingdom’s oil-market partner, Russian President Vladimir Putin, also needs fund for his war against Ukraine.
“For me, the impact is more important on sentiment than the numbers,” said Amrita Sen, director of research at consultant Energy Aspects. “The market has been incorrectly viewing Opec+ as wanting to flood the market to regain market share,” but instead, their “primary focus remains keeping oil inventories under control”.
In June, the Opec and its partners outlined a road map to gradually restore in monthly tranches 2.2 million barrels a day of output halted over the past two years.
Yet deteriorating fundamentals have thwarted their plans, with demand in China suffering a four-month contraction and supplies climbing in the US, Brazil, Canada and Guyana. US oil production jumped to a fresh monthly record of 13.4 million barrels a day in August.
“Given all the geopolitical tension in the Middle East and, perhaps more importantly, the upcoming US presidential elections, it makes perfect sense for Opec+ to postpone the unwinding of the voluntary cuts for an extra month,” said Jorge Leon, senior vice-president at consultant Rystad Energy.
Opec+ has struggled to get some members – notably Russia, Iraq and Kazakhstan – to implement their share of agreed supply cutbacks. The trio have promised to comply better, and make additional curbs to compensate for overproduction, but have generally been pumping in excess of their quotas.
The 23-nation alliance is set to gather on Dec 1 to review policy for 2025. BLOOMBERG
