OPEC+'s Plan to Extend Production Cuts Causes Market Overreaction

Extension of Oil Output Cuts

The Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed on Sunday to extend most of its oil output cuts well into 2025. This decision comes in light of slow demand growth, increased U.S. production, and high interest rates. Currently, OPEC+ is cutting output by a total of 5.86 million barrels per day (bpd), which is about 5.7% of global demand. This includes 3.66 million bpd of cuts previously set to expire at the end of 2024, and voluntary cuts by eight members of 2.2 million bpd, expiring at the end of June 2024. This announcement led to an oil price selloff, with front-month Brent falling to a four-month low below $77 per barrel (bbl).

Market Reaction and Analysis

Commodity analysts at Standard Chartered believe that the price undershooting was due to markets being dominated by a combination of extreme macroeconomic pessimism, speculative shorts, and over-enthusiastic algorithmic trading. According to data from Bridgeton Research Group, oil futures markets have now flipped to a net short position in Brent, compared with a net long position at the end of last week.

Standard Chartered argues that the oil price rout was triggered by market expectations for a significant volume of OPEC+ oil returning to the global markets 2024. However, they believe this explanation does not hold much water. According to them, the increase in Q4 relative to Q2 is likely to be a modest 360 kb/d, with OPEC+ having room to increase production by 1 million b/d without upsetting market balance. They also point out that the phase-out will be conditional depending on the state of global markets at the time.

Other Bullish Factors Overlooked by the Markets

Standard Chartered has pointed out a number of other bullish factors that the markets have overlooked. These include the extension of the 1.65mb/d of voluntary cuts agreed in April 2023 to the end of 2025, the reaffirmation of the required production level for all OPEC+ countries across 2025, and the agreement reached in the long-running discussion with the UAE, resulting in a 300kb/d increase in the UAE’s required production level, spread out over nine months starting in January 2025.

European Gas Market Dynamics

Meanwhile, Standard Chartered has reported that there has been no change in the dominant dynamics of the European gas market, with inventories building slower than usual and the markets still proving highly sensitive to supply issues. The natural gas supply-side continues to be plagued with challenges. The latest supply disruption that triggered a rally was a fault in Norway’s Sleipner gas field. Standard Chartered has predicted that whereas the outage is likely to be short-lived, prices are likely to remain elevated bolstered by slower-than-average inventory builds.

Closing Thoughts

The decisions made by OPEC+ and their impacts on the market are a complex interplay of factors. It seems that the markets may have overreacted to the extension of production cuts, overlooking other bullish factors. What are your thoughts on this issue? Share this article with your friends and engage in a discussion. Don't forget to sign up for the Daily Briefing, which is everyday at 6pm.