OPEC+ may have put a floor under crude prices by extending oil supply cuts for another quarter, but the group will soon face a more grueling test.
Saudi Arabia and its partners agreed Sunday to keep roughly 2 million barrels of daily output offline until midyear, a move that should balance global markets and buoy futures above $80 a barrel.
Bullish traders may even cheer that alliance member Russia has pledged to focus more on constricting production than exports. If Moscow follows through, that may help tighten inventories when oil demand climbs during summer in the Northern Hemisphere.
Yet a tougher choice lies in store when the Organization of Petroleum Exporting Countries and its partners hold their next ministerial meeting, scheduled for June 1 in Vienna.
If the coalition wants to prevent global markets from tipping back into surplus, it may need to persevere with output curbs for the entire year, projections from the International Energy Agency show.
Other forecasters, such as Standard Chartered Plc, contend that demand will be strong enough for OPEC+ to relax the cuts and revive production.
Saudi Arabia has shown it’s willing to keep a tight rein on supplies, but if cutbacks are prolonged further, the cooperation of fellow OPEC+ members is far from guaranteed.
The producers have been restraining output — and sacrificing sales volumes — for most of the time since the group was founded in 2016. They must weigh up how much longer to keep oil in the ground when the energy transition is starting to erode demand growth.
The United Arab Emirates is now sitting on about 1.5 million barrels a day of idle output, or about a third of its total, after investing substantially in new facilities. Abu Dhabi has always been eager to monetize its capacity, and has clashed before with Riyadh over the right to have it recognized.
Then there’s Iraq, which is once again flouting its OPEC+ production quota while seeking revenues to rebuild its shattered economy. Baghdad has promised to do better, and will need to deliver for the group’s collective effort to succeed.
“The need for unity and discipline must prevail,” brokerage PVM Oil Associates said. “OPEC+ will be sorely tested in 2024.”
–Grant Smith, Bloomberg News
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