The group of eight OPEC+ countries that pledged on November 30, 2023, to implement voluntary production cuts for the first quarter of 2024 have decided to fully extend the cuts until the end of this year’s second quarter, Rystad Energy Senior Vice President Jorge Leon said in an oil market update sent to Rigzone on Monday.
“Saudi Arabia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman announced on Sunday that the 1.7 million barrels per day (bpd) of voluntary cuts that were initially planned just for this year’s first quarter will not be unwound and will continue next quarter,” he said in the update.
“Russia, which in November pledged to implement voluntary export cuts (300,000 bpd for crude and 200,000 bpd for fuel products) for the first quarter of this year has announced the implementation of 471,000-bpd voluntary cuts now coming from both crude production and crude exports,” he added.
In the update, Leon noted that the common view in the market was that the group would partially extend the cuts into this year’s second quarter in some form but said the latest announcement “goes above market expectations”.
“Our assumption was that there would be a prompt unwinding of the voluntary cuts in the second quarter so that OPEC+ crude production would rapidly increase above 36 million bpd by May,” he stated in the update.
“The updated profile now shows OPEC+ crude production at 34.6 million bpd for the whole of the second quarter before increasing to around 36.3 million bpd in the second half of the year,” he added.
According to Leon, this new move by OPEC+ “clearly shows strong unity within the group, something that was put into question after the November ministerial meeting, which saw Angola leaving OPEC”.
“It also shows robust determination to defend a price floor above $80 per barrel in the second quarter,” Leon added.
In the update, the Rystad SVP highlighted that Rystad’s market assessment showed that, “if OPEC+ rapidly unwound the voluntary cuts, downside price pressure would have accentuated, taking prices down to $77 per barrel in May”.
“In fact, in that outdated scenario, our liquids balance showed the market rapidly turning from deficit in the first quarter (-1.1 million bpd) to a surplus in the second quarter, particularly in April and May (1.2 million bpd),” Leon added.
Leon said in the statement that the updated market balance now shows that “the deficit will continue into the second quarter (-0.9 million bpd), which should add upside price pressure and keep prices above $80 per barrel”.
“We believe that the resulting upside price in the second quarter will not have a significant impact on demand prospects and will not derail the fight against inflation in Western economies,” he added.
“At the same time, the impact on U.S. shale production should be marginal,” he continued.
No Further Extension Necessary
Leon noted in the statement that, looking into the second half of this year, “our balances show a strong demand rebound, which implies that no further extension of the voluntary cuts are needed to support prices”.
“If the voluntary cuts are fully unwound at the end of June, we anticipate a market deficit of around 440,000 bpd in the second half of the year,” he added.
“Interestingly, OPEC’s latest Monthly Oil Market Monthly report also shows strong demand growth in the second half of this year, with third-quarter demand growing a jaw dropping 2.7 million bpd (year on year),” he continued.
While Sunday’s announcement tightens the oil market and adds upside price pressure, such a move by OPEC+ might also be seen as a sign that demand prospects in the second quarter are less optimistic than the group thought in November last year, Leon said in the update.
“However, OPEC’s MOMR estimates of the demand level for the second quarter have actually increased,” he added.
“In November, the group estimated demand to average 103.6 million bpd in the second quarter. In its latest report, demand is now estimated at 103.9 million bpd,” he continued.
Leon noted in the update that the recent increase in geopolitical risk in the market “could also be playing a role in this decision”.
“With increasing uncertainty around the geopolitical situation in the Middle East … the likelihood of a ceasefire between Israel and Hamas has drastically decreased,” he added.
“In such an environment, extending voluntary cuts instead of unwinding the cuts provides Saudi Arabia, the UAE, and Kuwait with more spare capacity that could be needed if the conflict escalates further, and the market sees actual supply disruptions,” he continued.
Priced In?
In an oil and gas report sent to Rigzone on Sunday, which focused on the OPEC+ extension, Macquarie strategists said, “as market expectations for a rollover had grown more apparent recently, we believe the extension may have been increasingly priced in”.
“Although the cut extension could provide additional momentum to an oil market exhibiting recent strength, we note the IEA anticipates global refining runs remaining subdued through May, before a material increase in June,” the strategists added in the report.
Macquarie strategists also noted in the report that, with Sunday’s extension, Saudi Arabia’s extra one million barrels per day of cuts will now stretch for a full year.
“With OPEC loadings appearing steady and aggregate OPEC supply potentially showing little effect from incremental voluntary cuts implemented in Q1, we do not view the extensions from the broader group as particularly impactful,” the strategists said in the report.
“Likewise, while explicit Russian production cuts may be viewed as a marginal positive, we hesitate to put too much weight on Russian compliance. In short, we view this as largely a Saudi matter,” they added.
“Isolating on our Saudi supply assumption, relative to our December 2023 base case, which had anticipated a gradual easing of the one million bpd voluntary cuts from April, the cut extension would still leave our global supply and demand balance in surplus in Q2,” they continued.
“Extensions from Kuwait and Algeria, which we generally view as highly compliant producers, would provide an additional, modest degree of tightening relative to that scenario,” they went on to state.
“As such, production outside this core group could function as the swing in the Q2 balance; loadings/ compliance from this group remain items to watch ahead of the next ministerial meeting,” the strategists continued.
In the report, Macquarie strategists warned that they still see inherent challenges in Saudi Arabia’s oil market strategy, “particularly as we stretch the calendar to 2025”.
“In the past two years, we believe the non-OPEC supply response has greatly exceeded market expectations,” they said in the report.
“While non-OPEC growth will surely experience fits and starts, we continue to view current/forward crude prices as stimulating ongoing shale growth and also see a heavy schedule of long lead time offshore supply starting up in 2025,” they added.
“Further complicating matters are Saudi Arabia’s own large project start-ups in 2025 (presuming no changes despite the recent capacity announcement) and Kazakhstan's long-awaited Tengiz expansion,” they continued.
“In short, while we do not doubt Saudi Arabia’s ability to provide material support to the oil market through year end 2024 if it so chooses, smoothly returning supply in 2025 may prove difficult thereafter,” they went on to state.
OPEC Statement
A statement posted on OPEC’s website on Sunday said the OPEC Secretariat “noted the announcements of several OPEC+ countries extending additional voluntary cuts of 2.2 million barrels per day, aimed at supporting the stability and balance of oil markets”.
The statement noted that these voluntary cuts are calculated from the 2024 required production level as per the 35th OPEC Ministerial Meeting held on June 4, 2023, and added that they are in addition to the voluntary cuts previously announced in April 2023 and later extended until the end of 2024.
“These additional voluntary cuts are announced by the following OPEC+ countries : Saudi Arabia (one million barrels per day); Iraq (220,000 barrels per day); United Arab Emirates (163,000 barrels per day); Kuwait (135,000 barrels per day); Kazakhstan (82,000 barrels per day); Algeria (51,000 barrels per day); and Oman (42,000 barrels per day) for the second quarter of 2024,” the statement said.
“Afterwards, in order to support market stability, these voluntary cuts will be returned gradually subject to market conditions,” it added.
“The above will be in addition to the announced voluntary cut by the Russian Federation of 471,000 barrels per day for the same period (second quarter of 2024), which will be from crude oil production and exports as follows - in April 350,000 barrels per day from production and 121,000 barrels per day from exports; in May 400,000 barrels per day from production and 71,000 barrels per day from exports; in June 471,000 barrels per day totally from production,” it continued.
Russia’s voluntary production cut is in addition to the voluntary cut of 500,000 barrels per day previously announced in April 2023, which extends until the end of December 2024, the statement said. The export cut will be made from the average export levels of the months of May and June of 2023, it added.
According to OPEC’s website, the next meeting of the joint ministerial monitoring committee is scheduled for April 3, while the next OPEC and non-OPEC ministerial meeting is scheduled for June 1.
To contact the author, email andreas.exarheas@rigzone.com
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