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OPEC+ output cuts extended: a difficult decision amidst market uncertainty

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The oil markets were left on the edge after the Organization of the Petroleum Exporting Countries and allies postponed their much-anticipated meeting on Sunday. 

OPEC on Thursday said that the ministerial meeting scheduled for Sunday will now be held on December 5. 

Oil prices have been moving sideways on Friday, “partly because another postponement of the production increase by OPEC+, which was previously planned for January, was almost a foregone conclusion,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report. 

Lambrecht said the delay of the OPEC+ meeting has brought back some uncertainty in the market. 

“Officially, scheduling conflicts are cited as the reason, but there is also speculation whether – as has often been the case in the past – there are difficulties in formulating a joint production strategy,” Lambrecht said. 

Prices to remain rangebound ahead of the meeting

Analysts expect oil prices to remain rangebound in the lead up to the OPEC meeting next week. 

“Although this meeting will be crucial in terms of when in 2025 the production normalization will take place, low liquidity in US markets due to the Thanksgiving holiday on Thursday and early closure on Friday could be an issue,” Sriram Iyer, senior research analyst at Reliance Securities, told Invezz. 

Iyer said:

So, prices could remain rangebound ahead of the meeting.

Oil prices had come under pressure earlier this week due to easing of Middle East tensions as Israel and Lebanon-based Hezbollah agreed to a ceasefire deal brokered by the US. 

Prices were on course for a 3% decline this week so far as the market focuses on further cues from the OPEC+ meeting. 

According to David Morrison, senior market analyst at Trade Nation, the “technical picture” for West Texas Intermediate remains unchanged at present. 

OPEC+ left with a tough choice

Ahead of the ministerial meeting of OPEC+, a lot of market chatter indicated that the cartel does not have much of a choice, but to extend production cuts again. 

Eight members of the cartel, including Saudi Arabia and Russia, have been cutting oil production voluntarily by 2.2 million barrels per day since the beginning of the year. 

Saudi Arabia, the de-facto leader, of the group alone accounts for 1 million barrels per day of production cut. 

Moreover, the voluntary production cuts were set to expire in June this year.

However, these were extended four times since then to prop up oil prices. 

Iyer noted:

The reason for the pushback month after month as prices and demand, for that matter, fail to bounce and OPEC members have been waiting since the second half of 2024 to see demand from China rebound, which has failed to materialize.

A few weeks ago, reports suggested that Saudi Arabia would abandon its desire for higher oil prices to regain market share. 

However, if the cartel unwinds some of the production cuts from January and increases output, it could spell doom for the oil markets, according to experts. 

In a sense, Saudi Arabia and OPEC’s hands are tied because increasing production would mean a substantial glut.

This could drag down oil prices even further. 

Oversupply fears

According to the International Energy Agency (IEA), the oil market remains fairly well supplied.

Additionally, the IEA said even without OPEC unwinding some of the voluntary production cuts from January, the world will have excess crude oil next year. 

According to the Paris-based energy watchdog’s estimates, growth in global oil demand is expected below 1 million barrels per day next year. While, non-OPEC supply alone is expected to rise by 1.5 million barrels per day. 

Source: Commerzbank Research

In such a scenario, if OPEC+ turns on the taps from January, the market will be overflowing with crude oil. 

Meanwhile, there is also anticipation of the US oil and gas output rising sharply under the President-elect Donald Trump’s administration. 

Trump is expected to unveil a wide-ranging energy plan that would increase drilling for oil and gas off the coast of the US and on federally-owned lands. 

The President-elect is also expected to roll back several climate regulations, which were passed under the current administration. 

The US is the world’s largest producer of crude oil. 

OPEC may extend output cuts for three months

According to Commerzbank, OPEC+ may extend its steep voluntary production by three months till the end of March 2025. 

“In principle, however, we are sticking to our view that the planned production increase will be postponed for at least another three months, as otherwise there would be a risk of massive oversupply on the oil market,” Lambrecht said. 

Meanwhile, Morrison of Trade Nation echoed the same tone:

The group is expected to announce yet another extension to its longstanding output cuts, beyond the end of this year. These cuts, borne mainly by Saudi Arabia and Russia, have helped put a floor under prices. 

Lambrecht also said the rescheduling of the meeting could indicate indecision to formulate a clear production plan. 

“The numerous consultations in the run-up to the event could also be an indication of this. However, we suspect that this is more about individual quotas than the overall strategy,” she said.

For example, the United Arab Emirates was granted a gradual increase in production from January as it has invested heavily in increasing capacities. 

The UAE has also been producing more than its mandated quotas for the past few months. 

Therefore, extending the production cuts once more beyond this year may not seem so straightforward as the market makes it to be. 

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