Why Oil Markets Reacted Negatively to the OPEC+ Announcement | OilPrice.com

On Sunday, the Organisation of Petroleum Exporting Countries and their partners in OPEC+ agreed to extend a set of production cuts first announced last year. The duration of that extension, widely anticipated to cover the second half of 2024, will instead cover the rest of this year and the whole of 2025. In a way, OPEC blinked.

The idea of the production cuts was to put a floor under oil prices and, hopefully, help them move higher. With voluntary cuts across eight OPEC members at 2.2 million bpd and group-wide cuts of 3.66 million bpd, the total amount of oil withheld from markets comes in at close to 6 million bpd-which is set to continue being withheld for another 18 months. And yet oil prices dropped after the OPEC+ meeting and announcement. They dropped sharply.

The reason prices dropped, highlighting how much tougher the OPEC+ job of controlling prices has become, was because of one part of the official announcement. OPEC+ would extend its cuts, the group said, but it might begin to wind down some of these cuts later in the year, should market conditions improve-meaning if benchmarks reach the desired level.

Judging by the reaction of traders to the news of possible additional supply coming to the market, the chances of that happening are rather slim. And this leaves OPEC+ with no choice but to stick to the cuts for the observable future-and hope its demand projections turn out to be right.

Last month, OPEC’s secretary-general reiterated the cartel’s 2024 demand growth forecast, which put growth at 2.2 million bpd, bringing the total to 104.5 million bpd. For next year, OPEC sees a slight weakening in demand growth to 1.8 million bpd. So it extended most of its cuts, although it agreed to grant the UAE a higher production baseline meaning more production, beginning from January next year. The higher baseline adds 300,000 bpd to the UAE’s quota.

That 300,000 bpd and the news of lower U.S. retail gasoline prices caused a slump in oil benchmarks, with both Brent crude and WTI shedding over $4 per barrel in a day. That slump means the market remains of two minds about OPEC’s demand projections or rather, of one mind that is not in tune with OPEC’s take on the situation.

Data for the first five months of the year seems to support the weak demand growth argument. According to LSE Group data cited by Reuters’ Clyde Russell, oil imports to Asia from January to May were 100,000 bpd higher than the same period in 2023, at an average of 27.19 million bpd. This was much weaker growth than OPEC would need for its 2.2-million-bpd growth scenario to pan out, Russell said in a column this week.

A decline in the average price of gasoline in the United States also contributed to the bearish sentiment of traders that triggered the selloff that pushed Brent down by $4 per barrel and cost WTI about $6 per barrel on Monday. GasBuddy reported that the average had shed $0.058 to $3.50 per gallon, which was immediately translated as weaker demand in the world’s largest consumer of crude.

All this leaves OPEC+ with no real options besides sticking to the cuts for as long as necessary and hoping that demand will pick up in the second half of the year. This is not an ideal scenario because some OPEC and OPEC+ producers would be perfectly happy with oil prices below $80 per barrel and a larger market share. These producers may start to grumble against the cuts at some point, making it harder to keep them going. In any case, the cuts cannot last indefinitely. OPEC’s only hope for those to succeed is stronger demand.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com: