Over the next few days, OPEC+ countries need to decide whether to extend their “voluntary” oil output cuts into the second quarter. The market anticipates a full rollover. Instead, I believe the cartel has a chance to add a bit of extra supply, taking some short-term pain for a long-term gain.
In November, several OPEC+ nations, led by Saudi Arabia and Russia, announced a series of production curbs totaling 2.2 million barrels a day for the first quarter of 2024. The official explanation was that the reduction was to support “the stability and balance of oil markets.” Even if left unsaid, the actual objective was clear: establish a firm floor for crude prices at around $80 a barrel.
What would come next was less clear at the time. “Afterwards, in order to support market stability, these voluntary cuts will be returned gradually subject to market conditions,” the group said on Nov. 30. Because OPEC+ needs to plan its production weeks in advance, that ”afterwards” means a decision for the second quarter has to come in the next few days.
OPEC+ is unlikely to call a formal meeting. Instead, the group of eight countries that announced the first-quarter cuts is poised to make a series of individual, simultaneous announcements in the coming days. But don’t be fooled: Behind closed doors, OPEC+ ministers are negotiating. Formal talks haven’t started yet, officials tell me, but informal exchanges of views are ongoing.
Inside the cartel, I hear there’s a strong view that “market conditions” don’t warrant more barrels right now. Oil prices, even if stronger than in late 2023, aren’t yet high enough to justify pumping more, some say. Part of the current market strength could also be a mirage, the thinking goes. In January, several disruptions, including cold US weather, reduced global supply, leading to larger-than-expected stock drawdowns. But that oil is coming back now. Moreover, refinery maintenance season is around the corner, reducing the need for oil, particularly during April.
OPEC+ officials favouring a continuation of the full 2.2 million-barrel reduction also worry about taking a decision nearly blind. The group lacks enough information, in part because Christmas and Lunar New Year festivities data for January and February make data difficult to interpret. Better to wait-and-see, they say.
Yet there’s also a minority view inside OPEC+ that advocates easing production cuts gradually during the second quarter. Those who support pumping more calculate both that there’s limited risk of triggering a price crash and that it makes strategic sense for the cartel.
An upbeat view of the oil market favours increased output. Brent crude, the global benchmark, is hovering just under $85 a barrel. The physical oil market, admittedly helped by the January disruptions, is healthy, with some pockets actually quite strong. The cost of crude for immediate delivery trades at a hefty premium to forward barrels, an indication of scarcity. Refinery margins, a good measure of underlying consumption for gasoline and other petroleum products, have also recovered significantly.
Oil refineries are complex machines, capable of processing multiple streams of crude into dozens of different petroleum products. For simplicity’s sake, the industry measures refining margins using a rough calculation called the “3-2-1 crack spread”: for every three barrels of West Texas Intermediate crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel such as diesel or jet-fuel. Measured by that benchmark, refinery margins are at their highest in nearly six months, having jumped to more than $30 a barrel from $17 a barrel in October.
Although petroleum consumption data for January is only starting to trickle out now, initial indications are positive. Indian demand appears robust, and Chinese consumption is healthy. Even in Europe, early numbers point to a very strong start of the year. Importantly, the outlook for the global economy looks brighter today than it was in November, when OPEC+ slashed output. By early May, the oil market would likely need the extra production, the upbeat view claims.
Strategically, pumping more oil has another benefit: By putting a lid on oil prices, the group can slow the expansion rate of the US shale industry. With Brent trading comfortably above $80 a barrel, the cartel risks stoking growth of its arch-rivals in Texas and New Mexico. Better to accept some short-term pain now, in the form of somewhat lower prices, to win a larger market share later.
The longer OPEC+ waits to unwind its production cuts, the more it subsidises America’s shale output. The window of opportunity opens now; the cartel shouldn’t wait for the next scheduled meeting in Juneto prepare to pump.
Javier Blas is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
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