The Organisation of Petroleum Exporting Countries and its allies' (OPEC+) decision to phase out voluntary supply cuts after September led to an immediate slump in crude oil prices this week.
Crude oil prices have traded below $80 per barrel after June 2—the day of the OPEC meeting—due to worries around oil surplus in a demand-strained market.
Moneycontrol takes a look at the decision by the OPEC+ and the fundamentals driving prices.
What did the OPEC+ decide?
The Saudi-led oil cartel, in its latest meeting, decided to continue the voluntary cuts of 2.2 million barrels per day (bpd) till September 2024. Thereafter, the group plans to phase out the supply cuts over a year, i.e. till September 2025, in a monthly fashion.
OPEC added that the monthly increase in production after September 2024 could be paused or reversed based on the market conditions.
OPEC and its allies have currently put in place a total production cut of around 6 million barrels per day (bpd). Of this, a production cut of 3.66 million bpd is to be implemented till the end of 2024 while the voluntary cuts of 2.2 million bpd expired in June and have been extended till September 2024.
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What was the impact on crude prices?
Brent prices tumbled by $3 per barrel on June 3 to $78 a barrel, the lowest since February, on account of OPEC+ decision to phase out supply cut in a well-supplied market. On June 7, crude oil prices were hovering around $78 per barrel compared to the range of $80- $82 in the previous week.
Demand has continued to remain weak globally, especially in China- the largest crude oil consumer in the world.
The behaviour in crude oil prices after the recent OPEC decision has been opposite to the price movement at the beginning of 2024. Amid supply cuts announced by the producing countries and geopolitical tensions in the Middle East, prices climbed to $90 per barrel in April and rose 16 percent in the first three months of the calendar year 2024.
“Brent crude futures are hovering below $80 per barrel after dropping to the lowest level in four months after the OPEC+ announcement on June 2. The market reaction has been a bearish bias to the extension of the cuts to the end of the third quarter. This is probably more driven by the bearishness on the product market side and the fear of a demand misfire triggering cuts in refinery runs out and lower crude demand,” Rystad Energy said in a note.
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How are prices expected to move further?
Analysts expect that crude oil could see an uptick in prices with the rise in demand in the summer season. OPEC, in its latest report in May, had forecasted robust global oil demand for 2024 with a growth by 2.2 million bpd, supported by strong air travel demand and healthy road mobility.
“The decline in the price of Brent can be attributed to apprehensions regarding the demand for gasoline and diesel triggered refinery run cuts. Our signal is that the price could see an upturn towards the $85 mark in the near future. What the market is missing is that summer seasonal demand is still ahead, and it is too premature to conclude that it will turn out to be very lacklustre,” said Rystad Energy.
The oil cartel has also reassured investors, after the slump in prices, that OPEC would take a call on phasing out of production cuts depending on the reaction of the market.
Domestic brokerage Sharekhan said in a note on June 3: “Crude oil prices are having strong support of $75, while the initial reaction of OPEC+ decision had a knee jerk sell off reaction, but we expect the summer driving season from along with Hurricane season could see WTI trading above $80 in coming weeks.”
Would this have an impact on India?
The extension of supply cuts by OPEC+ till September 2024 is expected to have no impact on the supply of crude oil to India as the oil demand of the country has been met fairly till now. India is dependent on imports for over 85 percent of its total crude oil requirements.
Even though the supply of crude oil would not be an issue for India, higher crude prices directly impact the performance of state-owned oil marketing companies (OMCs), which control retail fuel prices in the country.
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