OPEC+ is expected to extend oil production cuts into the second half of the year to avert a global surplus and support prices.
Saudi Arabia and its partners have shut down about 2 million barrels a day this year and will meet on June 1 to consider whether to proceed. Crude oil prices surged last month on fears that the conflict in the Middle East could disrupt oil supplies, leading to rumors that OPEC+ could restart production to calm the market.
But 87% of traders and analysts surveyed by Bloomberg expect the Organization of the Petroleum Exporting Countries and its allies to potentially extend restrictions through the end of the year.
“OPEC+ will want to see signs of continued tightness in oil markets before beginning to expand supply. Therefore, there is a good chance they will opt for an extension,” said Richard Bronze, an analyst at Energy Aspects Ltd. “Discussions will not begin in earnest until the meeting approaches.”
Oil prices fell to a six-week low of nearly $84 a barrel in London as traders shrugged off hostilities between Iran and Israel, while the market outlook brightened amid weakening growth in China and plentiful crude supplies from the United States , Brazil and Guyana darken.
The price drop could provide some relief to consumers and central banks struggling with stubborn inflation, and even to President Joe Biden, who is running for re-election, as gasoline prices are never far from the political agenda.
Still, it is a concern for many of the 22 OPEC+ countries.
Group leader Saudi Arabia needs prices near $100 a barrel as Crown Prince Mohammed bin Salman spends heavily on futuristic cities and top athletes, according to International Monetary Fund estimates. Co-head of state Russia also needs income as President Vladimir Putin continues to wage war against Ukraine.
Price pressure
If OPEC+ eases supply restrictions, global oil markets could return to surpluses, adding to pressure on prices, according to the International Energy Agency in Paris. The supply situation will only worsen as OPEC+ continues to trade, Shell Plc Chief Financial Officer Sinead Gorman said on Thursday.
26 out of 30 survey participants predicted that OPEC+ would hold out, and eight of them predicted that restrictions would last until the end of 2024 or even longer. Only four predicted production increases of up to 1.1 million barrels per day.
The alliance, which will meet at its Vienna headquarters on June 1, has not yet signaled its intentions.
The OPEC Secretariat promised in a report that the group would closely monitor oil markets in the coming summer months for signs of tightening, a change in tone that some observers interpreted as a signal of a willingness to increase barrel values. Meanwhile, Riyadh and Washington are privately negotiating a security pact that, if finalized, could encourage the kingdom to adopt a more accommodative oil policy.
Turning point
Still, Saudi Energy Minister Prince Abdulaziz bin Salman has not commented publicly and sometimes reveals surprising decisions to punish speculators. Several OPEC+ delegates said privately it was too early to form an opinion.
“We are at an inflection point in oil markets where there are good reasons to increase volumes,” said Christyan Malek, global head of energy strategy at JPMorgan Chase & Co. Still: “This is a balancing act – there are good ones Reasons for this.”, and also a case that should not be added. It’s not clear.”
Internal divisions could also hinder consensus.
While Saudi Arabia often urges caution in providing supplies to the market, its neighbor the United Arab Emirates sometimes takes a contradictory stance.
Abu Dhabi is under less financial pressure to keep prices high and is eager to make new investments in production capacity. The emirate currently has unused reserves of more than a million barrels a day and blamed losses from OPEC+ quotas when it cut its economic growth forecasts last month.
fulfill obligations
OPEC+ must also address the question of whether all members are honoring their commitments.
Iraq and Kazakhstan have admitted pumping hundreds of thousands of barrels over their agreed limits, and although they have committed to further cuts in compensation, they have a patchy record on delivery.
Russia’s cooperation was also unclear.
Riyadh reluctantly allowed the country to meet its share of first-quarter production cuts through a mix of cuts in exports of crude oil and refined products, an arrangement further complicated by Ukrainian drone strikes on Russian refineries. Moscow has promised to increase its contribution and focus more on reducing crude oil production.
Still, since the alliance was founded seven years ago, OPEC+ has repeatedly shown that it can overcome divisions and work effectively in the face of the collective risk of fluctuating prices. A fragile market could again force the group to adhere to supply restrictions and implement them better.
“Allianz will have no choice but to stay the course,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “Anything else would most likely result in a sell-off.”