Oil prices held steady after OPEC+ unveiled a plan to gradually restore production starting in October, despite ongoing concerns about global demand and substantial supply from non-OPEC+ producers. The Saudi Energy Ministry announced that production cuts would continue in full through the third quarter before being phased out over the following 12 months. Brent crude traded near $81 a barrel, while West Texas Intermediate hovered around $77.
Goldman Sachs Group Inc. characterized the OPEC+ decision as bearish, citing a recent increase in inventories. However, UBS Group AG and RBC Capital Markets LLC expressed confidence that the alliance would continue to manage the market effectively. Most analysts had anticipated OPEC+ would extend the cuts through the end of the year.
The agreement aims to support oil prices while easing production constraints, which some members, like the United Arab Emirates, had resisted, seeking higher output levels. "We have seen a rather muted price response so far," said Ole Hansen, head of commodity strategy at Saxo Bank A/S. He added that while moderating cuts from October might weigh on the market, demand is still expected to pick up over the coming months. Hansen noted, "We view the $75 level in Brent as a major line in the sand below which OPEC+ would likely step up their efforts to support prices."
Trading volumes were higher than usual on Monday, but oil option skews indicated bearish sentiment, with puts (which profit from lower prices) maintaining a wide premium over calls. Oil capped a monthly loss on Friday, driven by persistent concerns about demand in China, the world's largest crude importer. The prompt spread for Brent briefly slipped into a bearish contango structure last week, signaling potential weakness in the market.
Despite these challenges, futures have risen this year amid geopolitical tensions from the Middle East to Ukraine. The ongoing conflict in Gaza and Israel's rejection of a cease-fire plan proposed by U.S. President Joe Biden have added to supply concerns.
OPEC+ agreed on Sunday to extend most of its deep oil output cuts into 2025, aiming to bolster the market amidst tepid demand growth, high interest rates, and increasing U.S. production. Brent crude prices have hovered near $80 per barrel recently, below what many OPEC+ members need to balance their budgets. Concerns over slow demand growth in China and rising oil stocks in developed economies have also weighed on prices.
The OPEC+ cuts, totaling 5.86 million barrels per day (bpd), or about 5.7% of global demand, include 3.66 million bpd of cuts set to expire at the end of 2024 and voluntary cuts by eight members amounting to 2.2 million bpd, expiring at the end of June 2024. On Sunday, OPEC+ agreed to extend the 3.66 million bpd cuts by a year until the end of 2025 and prolong the 2.2 million bpd cuts by three months until September 2024, with a phased reduction from October 2024 to September 2025.
"We are waiting for interest rates to come down and a better trajectory for economic growth," said Saudi Energy Minister Prince Abdulaziz bin Salman. He emphasized the group's readiness to pause or reverse the unwinding of cuts if demand proves insufficient.
Analysts had anticipated OPEC+ would extend voluntary cuts due to falling oil prices and sluggish demand. However, they also predicted difficulties in setting 2025 targets due to unresolved individual capacity quotas, which had previously caused tensions. The UAE, for example, has been pushing for a higher production quota, arguing its capacity has been underestimated.
In a surprise development, OPEC+ postponed discussions on capacity targets until November 2025, agreeing instead on a new output target for the UAE, allowing it to gradually raise production by 0.3 million bpd from the current 2.9 million bpd. The group also decided to use independently assessed capacity figures as guidance for 2026 production, postponing a potentially contentious discussion by a year.
Prince Abdulaziz prepared the deal over several days, inviting key ministers to Riyadh for in-person discussions despite meetings being scheduled online. The countries making voluntary cuts include Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia, and the UAE.
Amrita Sen, co-founder of the Energy Aspects think tank, noted, "The deal should allay market fears of OPEC+ adding back barrels at a time when demand concerns are still rife." She added that the agreement represents a significant show of solidarity for the group and Prince Abdulaziz.
OPEC+ will hold its next meeting on December 1, 2024, continuing its efforts to stabilize the oil market in the face of ongoing economic and geopolitical challenges.
