(Bloomberg) — OPEC+ has the outline of a deal to extend a crucial tranche of its oil supply cuts into the second half of the year, delegates said, as the group continues its efforts to avert a global surplus and shore up prices.
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The so-called “voluntary” cuts from key members including Saudi Arabia and Russia total roughly 2 million barrels a day and are set to expire at the end of June. Those curbs come in addition to a group-wide agreement capping total crude output at about 39 million barrels a day, which the alliance is also discussing extending into 2025, the delegates said, asking not to be named because the talks were private.
OPEC+ ministers are gathering on Sunday for a hybrid meeting to decide oil policy, with some attending in-person talks at the Ritz hotel in Riyadh and others participating online. Traders and analysts have widely expected the extension of the group’s cuts, seeing it as necessary to offset soaring production from several of OPEC+’s rivals — most notably US shale drillers — and a fragile economic outlook in top consumer, China.
While crude prices briefly soared above $90 a barrel in April as conflict in the Middle East threatened regional exports, they’ve since declined. Brent futures settled at $81.62 a barrel on May 31, a drop of 7.1% for the month.
Lower oil prices have offered some relief to central banks grappling with persistent inflation, but threaten revenue for producers like Saudi Arabia. The kingdom needs prices close to $100 a barrel to fund the ambitious spending plans of Crown Prince Mohammed bin Salman, the International Monetary Fund estimates. In parallel to the OPEC+ meeting, the Saudi government completed a $12 billion sale of shares in state oil giant Aramco, raising funds to help pay for a massive economic transformation plan.
Oil market indicators have likely impressed the need for caution on the Organization of Petroleum Exporting Countries and its allies. The premium on prompt Brent contracts — known to traders as “backwardation” — has been dwindling, suggesting that world markets are tipping from scarcity into surplus.
Data from the International Energy Agency in Paris indicate that OPEC+ needs to persevere with the curbs in order to engineer a global supply deficit in the second half. If the group were to unwind the restraints and restore production, a new oversupply would emerge.
To ensure that conditions tighten, the coalition may also need to ensure that members are fully implementing their pledged cutbacks.
While some nations including Saudi Arabia, Kuwait and Algeria promptly fulfilled their agreed share, others like Iraq, Kazakhstan and Russia dragged their heels, and continue to collectively pump several hundred thousand barrels a day above their designated quotas.
All three have pledged to improve their performance, and make additional “compensation” cuts to offset the initial overproduction. But they have a patchy track record when it comes to compliance.
–With assistance from Ben Bartenstein, Salma El Wardany, Fiona MacDonald and Anthony Di Paola.
(Updates with background from seventh paragraph.)
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