The extension of OPEC+ production cuts are incrementally bearish prices
- OPEC+ has extended all three dimensions of its production cuts at its meeting on 2 June – (i) the 2m b/d November 2022 group wide cuts will be extended through to 2025; (ii) the 1.7m b/d 2023 voluntary cuts will be extended through to 2025; and (iii) its 2.2m b/d 2024 of additional voluntary cuts will be extended through to Q3 2024.
- Whilst it was always the strategy of the 8 OPEC+ members to gradually return the 2.2m b/d of extra voluntary cuts (inclusive of Saudi Arabia’s 1m b/d “lollipop cut) to markets (given elevated spare capacity), we view the detailed timeline for unwinding them over the subsequent 12 months (Q4 2024 to Q3 2025), as incrementally bearish for oil prices.
- Absent any unforeseen surprises, we now see risks to our Brent call of USD88/b and USD93/b in Q3 and Q4 2024, respectively, as moderately skewed to the downside, given the OPEC+ message to markets that it is intent on (gradually) reversing its production cuts due to high spare capacity.
- Looking ahead, notwithstanding what we read as an incrementally bearish outcome, we continue to hold conviction that effective OPEC+ market management will ensure Brent crude remains in a USD80-100/b range through to 2025, with a USD80/b OPEC+ put from the group leveraging its inelastic pricing power, and a USD100/b ceiling from ample spare capacity to handle tightening shocks (see here).
