OPEC+ weighs extension of crude output cuts as ministers prepare to meet

OPEC and its Russia-led allies are widely expected to extend voluntary production cuts when they meet online June 2, though delegates have been tight lipped on how long the curbs will remain in place, with oil demand forecasts lacking consensus.

Some 2.2 million b/d in voluntary cuts are due to expire at the end of June, just as many market watchers see seasonal demand rising. But the outlook into 2025 is far more uncertain, as stubbornly high inflation in key economies and growing non-OPEC+ supply have weighed on prices.

Producers implementing the voluntary cuts could release coordinated announcements on plans for the second half of 2024 independently from the OPEC secretariat.

The group meets as oil is trading well below 2024 peaks of above $93/b in early April. Platts, part of S&P Global Commodity Insights, assessed Dated Brent crude at $82.52/b on May 28. Analysts at Commodity Insights forecast an average price of $91/b for May-December, assuming that OPEC+ extends production cuts until the end of 2024.

"The price is a number that can change at any time, what we focus on is the investment dynamic. This is [currently] positive," one delegate said.

Analysts point to monetary policy from the US Fed and other central banks, as well as the specter if persistent high inflation as a key factor weighing on prices. Ahead of the meeting, OPEC+ officials hosted technical workshops at the OPEC secretariat in Vienna, with much of the discussion focusing on the outlook for interest rates, sources told Commodity Insights.

"If interest rates remain relatively high, that could continue to support a strong dollar, which tends to—but certainly not always—exert downward pressure on oil prices," said Jim Burkhard, Commodity Insights' vice president, oil markets, energy and mobility.

He added that geopolitics and OPEC+ decision making could offset the impact of interest rates and the value of the US dollar.

Compliance challenge

Lower prices are increasing scrutiny of producers' compliance with quotas.

Russia, Iraq and Kazakhstan have already pledged to compensate for overproduction in early 2024, but several other producers have yet to follow suit. They could now come under pressure to commit to compensation at the June 2 meeting.

"We are also seeing lax compliance with agreed production cuts from a number of producers – for OPEC to maintain its credibility with markets and demonstrate its authority, these countries need to be reined in," said Tamas Varga, analyst at PVM Oil Associates.

Russia produced above quota for the first time in 2024 in April, as it struggled to meet its commitment to deeper cuts in the second quarter. It produced 9.29 million b/d in April, the Platts OPEC+ survey by Commodity Insights found, above its target of 9.099 million b/d in April. The Russian Energy Ministry attributed this to technical challenges.

Furthermore, Russia has committed to make deeper cuts in May and June to bring its production on par with Saudi Arabia. Saudi Arabia met its target of 8.98 million b/d in April.

OPEC+ ministers are also gearing up for negotiations over changes to baselines from which quotas are set for 2025. The OPEC secretariat asked three external sources to produce estimates of member countries' crude production capacity by the end of June, with a view to bringing future quotas more in line with real capacity. Countries with high fiscal breakeven oil prices that have the potential to increase output are likely to fight hard for higher baselines.

The last meeting in November was moved online amid a dispute over sharp quota cuts for African members, when led to Angola quitting the group.

Demand uncertainty

OPEC+ members will be negotiating at a time of major differences in demand forecasts.

OPEC itself projects a 2.2 million b/d increase in global demand in 2024, and another 1.8 million b/d in 2025. This is significantly higher than the forecast of Commodity Insights, which expects world oil demand to grow by 1.7 million b/d and 1.1 million b/d for 2024 and 2025, respectively. Meanwhile the IEA's latest market outlook projects a rise in demand of 1.1 million b/d in 2024 and 1.2 million b/d in 2025.

OPEC+ officials have not announced the timing of the June 2 meeting, nor whether it will be followed by a customary press conference. The nine-country Joint Ministerial Monitoring Committee co-chaired by Saudi Arabia and Russia, tasked with assessing member compliance with quotas and making policy recommendations to the wider group, will convene virtually before the full OPEC+ meeting starts.