(BOE Report) – OPEC and its allies face a tricky dilemma: should they start loosening oil production caps even though the crude supply and demand picture is unlikely to improve in the near future? They may well opt to again delay the crucial moment to keep prices steady, but they increasingly risk losing control of the market.
The Organization of the Petroleum Exporting Countries and other major producers including Russia, an alliance known as OPEC+, is scheduled to gradually start unwinding years of deep production curbs in April.
The group is holding back a total of 5.85 million barrels per day of output, or about 5.7% of global demand, following a series of cuts made since 2022 to prop up the market.
The rollback of 2.2 million bpd of these cuts, announced in November 2023 for the first quarter of 2024, has since been delayed five times due to persistently weak oil demand and continued growth in global crude output.
Unfortunately for OPEC, the market backdrop is unlikely to improve markedly by April.
In fact, it may get worse as increasingly fractious trade relations between the United States and other major economies weigh on oil demand growth.
U.S. President Donald Trump has been urging OPEC’s de-facto leader Saudi Arabia to bring down the price of oil. And Trump’s conversation with his Russian counterpart Vladimir Putin and subsequent bilateral U.S.-Russia talks in Saudi Arabia have raised speculation about the possibility of a ceasefire in Ukraine and easing of U.S. sanctions on Moscow’s vast oil production.
DISCIPLINE
OPEC+ has been highly effective in maintaining relative stability in oil markets in recent years, largely because of members’ discipline. Benchmark Brent crude prices have stayed in a range of $70 to $100 a barrel since 2021, excluding a few months of volatility that followed Moscow’s invasion of Ukraine.
Yet by holding back significant production capacity, OPEC’s market share – and, by extension, its ability to continue controlling the market – has steadily declined as non-member producers boosted output. This includes drillers in the Permian shale deposits in Texas and New Mexico, where output has soared in recent years to make the United States the world’s top producer.
The U.S. Energy Information Administration (EIA) this month raised its outlook for U.S. oil production slightly to a new record of 13.6 million bpd in 2025. And although the pace of growth has decelerated, production is likely to remain steady for years.
The EIA expects global oil production to grow in 2025 by 1.6 million bpd, led by countries outside of OPEC+ group including the United States, Canada, Brazil, and Guyana.
Meanwhile, strains are growing within the alliance.
A $48 billion expansion of Kazakhstan’s giant Tengiz field, operated by Chevron, is expected to reach production of 260,000 bpd by the end of February, four months ahead of plan, which will bring its total production to 1 million bpd. In order for the central Asian state to stick to its production target, it would thus have to deepen its output cuts significantly, losing much needed revenue.
Nigeria has lifted production in recent months, while 300,000 bpd of oil exports from Iraq’s semi-autonomous Kurdistan region could resume soon following a two-year dispute.
The United Arab Emirates, a close Saudi ally, is also ramping up its own capacity following years of heavy investment. The Gulf state has already reached almost 5 million bpd in capacity, compared with a current official production level of 3.2 million bpd. The quota is set to increase by an additional 300,000 bpd this year.
TOUGH CHOICE
Supply growth in 2025 is set to outpace global oil demand, which is expected to rise by 1.1 million bpd after gaining 870,000 bpd the previous year, according to the International Energy Agency (IEA).
Trends in global oil inventories are more positive for OPEC, but only slightly. Stocks should start rising this year if production indeed outpaces demand, and more OPEC+ supplies would only accelerate this build-up.
OPEC+ thus faces a tough choice. Further delays in unwinding cuts has limited upside, as significant spare oil production capacity is already helping maintain stable prices by providing the market with a buffer. For producers growing capacity within the group, holding back output increases economic pressures.
A delay could irk Trump.
But on the other hand, increasing production in a well-supplied market could lead to an oil price sell-off.
So OPEC+ may well decide on another delay, but this choice comes with consequences, as the group of producers may see its credibility and market share erode even more.
** The opinions expressed here are those of the author, a columnist for Reuters**
(Reporting by Ron Bousso; editing by David Evans)
