William_Potter
There was a big announcement from OPEC+ earlier this week that has been rattling through the energy sector over the past several days. The group detailed a series of production cuts and extensions, giving participants a clearer tapering schedule through the end of 2025. Despite the proclamation, oil prices have struggled in recent sessions, with Brent crude (CO1:COM) falling under $80/bbl for the first time this year and WTI (CL1:COM) moving closer to $70, which is way off the $100 mark that OPEC+ is targeting with its new roadmap.
What’s going on? When delving deeper into the details of the agreement, there is a lot to consider aside from the headlines. Collective group cuts of 3.7M barrels per day were extended by a year until the end of 2025, but additional cuts of 2.2M bpd – which were supposed to expire this month – were only extended until Q3 of 2024. The latter grants OPEC+ the leeway to roll additional barrels back into the market, giving the group flexibility to restore more supply when conditions warrant their release.
It also means the market is only a quarter away from potentially higher output, which comes at a time when there are already concerns about the oil demand growth outlook. While OPEC+ has very bullish forecasts, many other agencies and analysts are bearish, especially given fading geopolitical risk premiums, which previously failed to generate any significant reaction despite tensions in the Middle East. Many big nations like China and India are also getting their crude from shadow fleets, while the output roadmap from OPEC kingpin Saudi Arabia may buy some political goodwill in Washington by helping the U.S. craft its own energy policy.
Cartel no longer? OPEC+ is pulling off a delicate balancing act, aiming to preserve its unity at a time when some in the group are building out production capacity. Two-thirds of the latest cuts are voluntary from individual nations, with members like the UAE feeling that it has to do more of the heavy lifting amid campaigns for higher quotas. Also remember that the total amount of current OPEC+ cuts is about 5.9M barrels per day, or 5.7% of global demand, which can somewhat be made up for by countries outside of the group like the U.S., Canada, Brazil and others.
Oil-related ETFs: NYSEARCA:USO, NYSEARCA:UCO, NYSEARCA:BNO, NYSEARCA:SCO, NYSEARCA:USL, NYSEARCA:DBO, NASDAQ:USOI, NYSEARCA:NRGU, BATS:OILK, NYSEARCA:USAI, NYSEARCA:UGA
