The meeting of the OPEC Plus group of countries on 2nd June decided to extend the existing cut in crude oil production of 3.85 million barrels per day further till September to December 2025. The oil cartel affects changes in the production level of 23 members of OPEC and non-OPEC countries periodically to ‘support the stability and balance of oil markets’. Going beyond the rhetoric, the purpose of the group, like all cartels, is to keep prices high.
If this is indeed the raison d’être of the group, did the extension of the cut achieve its purpose? The price of Brent oil fell sharply by $3.91 per barrel on 4th June. There was a sharper decline of $3.94 per barrel in the price of West Texas Intermediate (WTI) which reflects the US market conditions. The price of the Indian crude oil basket dropped from $ 80.65 per barrel on June 3 to $77.43 next day. Has OPEC Plus lost its capacity to influence oil prices? Unlikely. The group accounts for almost 40 percent of world oil production.
The market may have read OPEC’s decision to extend the production cuts well into next year as a signal that demand will remain weak, despite the group’s assertion that it will pick up. The geopolitical tensions in the Middle East have subsided as the Iran-Israel clash was contained after one round. Though the Gaza war shows no sign of early end, this part of the Middle East does not produce oil. The US Fed’s decision to keep the interests high could also have been a factor. High interest rates mean that economic activities will remain weak. There is also a fourth possibility. Despite OPEC’s decision to curtail production since last year, some members may be cheating and producing above their quota.
Factors Effecting OPEC’s Decision
The statement issued by the 37th meeting of OPEC plus countries suggests that production beyond the quota or voluntary cuts is indeed a factor. It welcomes the ‘pledges made by the Republic of Iraq, the Russian Federation, and the Republic of Kazakhstan to achieve full conformity and resubmit the updated compensation schedule’. The exhortation to ‘full conformity’ relates to the production levels agreed. Any member overproducing has to ‘compensate’ in terms of future production levels. This advice was there in the earlier OPEC statements of April and March also. The OPEC has also asked for an assessment by three independent sources of the production levels. This indicates that divergent claims of production levels have become an issue as the production cuts may not necessarily boost prices, but affect the revenue stream of member states. Different member states may have their internal or external compulsions. Russia for instance not only has defense expenditure to meet, but according to the Western media may have diverted more production for exports as domestic refining capacity is partially damaged by Ukrainian attacks.
The phasing out of production cuts follow an interesting schedule. The voluntary cuts of 2.2 million barrels per day announced in November 2023 are to continue ‘until the end of September 2024’, and then will be ‘gradually phased out on a monthly basis until the end of September 2025 to support market stability’. This suggests that OPEC member states have retained leeway to open the tap and increase production just before the US Presidential elections in November this year. Softening of oil prices, if it takes place, will no doubt be welcomed by Biden Administration.
What is The Demand-Supply Situation?
The future oil price behavior will depend upon the demand-supply situation. Nearly a week before the latest OPEC meeting, the OPEC Secretary General stated that the world oil demand is expected to grow by 2.2 million barrels per day (bpd) this year to reach 104.5 million barrels per day (bpd). The demand growth will come down to 1.8 million bpd in 2025 to reach 106.3 million bpd in 2025.
Of this total, the share of demand growth to be met by OPEC Plus next year will be 8,00,000 bpd, which will be subject to the group’s decisions.
The cuts announced by OPEC Plus have to be seen against the background of increased demand. The total production allocated by the group to its member states in the June meeting is 39.725 million bpd, including 24.135 million bpd by OPEC and 15.590 million bpd by the non-OPEC group of countries. It has sharply reduced production in the past few years even though the global demand has grown.
A one dollar increase in per barrel price of oil adds around Rs 12,000 crore to India’s annual oil import bill. How will the prices look next year? Most OPEC Plus member states have internal compulsions to keep the prices high. The group’s meeting on 2nd June coincided with Saudi Arabia's offering to sell less than 1 percent of ARAMCO’s shares to the tune of $12 billion. It has an interest in getting a good share price. It has also embarked upon an ambitious development and diversification program to reduce dependence on oil revenues. According to an estimate in the Wall Street Journal, it needs oil prices in the high 90s. The long-term phasing out of production cuts announced on June 2nd by OPEC Plus is intended to signal that the prices will remain high next year, though the market may have read a different meaning in the short run. As climate pressure mounts, ‘transitioning away’ from fossil fuels may not have a predictable pathway.
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