OPEC+ Agrees to Extend and Gradually Wind Down Oil Output Cuts

(Bloomberg) — OPEC+ agreed to extend its oil production cuts into 2025, while also setting a timeline for winding down some of those curbs in a move that could weigh on prices in the short term.

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The agreement reached in Riyadh on Sunday exceeds market expectations in some ways, extending so-called “voluntary” cuts from key members including Saudi Arabia and Russia well into 2025. However, it also begins rolling back those supply reductions earlier than some OPEC-watchers had predicted.

Prior to the meeting, traders and analysts had widely expected the extension of these supply reductions in order to offset soaring output from several of the alliance’s rivals, with some predicting they would continue until the end of 2024. Under the new agreement, the eight nations participating in these additional curbs will have added about 750,000 barrels a day to the market by January.

Crude prices have recently been in decline amid a fragile economic outlook in top consumer China and doubts about the pace of interest-rate reductions in major industrialized economies. Brent futures settled at $81.62 a barrel on May 31, a drop of 7.1% for the month.

Roughly 2 million barrels a day of OPEC+ cuts, which have played a key role in supporting crude prices above $80 a barrel this year, were set to expire at the end of June. Those curbs will continue in full through the third quarter then be gradually phased out over the following 12 months, according to a statement from the Saudi Energy Ministry.

Those “voluntary” cuts by the Organization of Petroleum Exporting Countries and its allies were in addition to an earlier group-wide agreement capping crude output at about 39 million barrels a day, which ran until the end of this year. The group also agreed to prolong that accord to the end of 2025, according to a statement on the OPEC website. The United Arab Emirates, which has invested heavily in new oil projects in recent years, was given a 300,000 barrel-a-day boost to its production target for next year.

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 its 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.

–With assistance from Ben Bartenstein, Salma El Wardany, Anthony Di Paola, Nayla Razzouk and Grant Smith.

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