【MACRO Insight】Crude Oil Big Signal! OPEC+ "Voluntary Production Cuts" Extended Until the End of 2024!

U.S. and Brent crude closed lower by $0.5 on Monday (June 3rd), with WTI crude falling below $77 per barrel. The decision by the OPEC+ weekend meeting to extend production cuts came as no surprise.

The recent OPEC+ meeting showed that the agreement reached in Riyadh on Sunday exceeded market expectations in some aspects, extending the “voluntary” production cuts of major member countries such as Saudi Arabia and Russia until next year. However, these major member countries will start gradually reducing the scale of production cuts from October, earlier than expected by some OPEC observers.

According to OPEC+'s statement, the organization plans to increase the daily production target to 39.725 million barrels in 2025, with the UAE's production quota rising to 3.519 million barrels per day. Collective production cuts will be extended until the end of 2025, voluntary production cuts until the end of September 2024, and there are plans to gradually phase out the daily 2.2 million barrels of production cuts between October 2024 and September 2025. Compensatory production cuts will remain effective throughout 2025.

The Saudi Energy Ministry welcomed Iraq, Russia, and Kazakhstan's renewed commitment to abide by the production cut agreement and plans to submit updated overproduction compensation plans by the end of June. The Saudi Energy Minister stated that OPEC+ could pause or reverse these measures but should act cautiously due to inconsistent market views and economic uncertainties.

The market's response to this meeting is mixed. Amrita Sen of Energy Aspects stated that the decision will lead to significant reductions in oil inventories this year and next, enabling OPEC+ to continue controlling the market.

Jim Burkhard, Director of Oil Research at S&P Global Commodity Insights, believes that while the extension of production cuts was expected, it's unlikely to have a direct impact on prices. However, the extension could lead to summer inventory declines, driving oil prices higher. There are downside risks to non-OPEC+ supply, and idle capacity among OPEC+ countries is increasing.

Goldman Sachs analysts expressed concerns, suggesting that the market's ability to absorb additional oil in October is challenged. They view this meeting as bearish-leaning, with downside risks to the Brent crude price range of $75-$90. If the market underperforms OPEC+ expectations, canceling the additional production cuts will make maintaining low production levels even more challenging.

PVMOil Associates senior market analyst Valga told reporters that the recent weakness in oil prices is closely related to monetary policy, as the Fed has delayed interest rate cuts, and policymakers are skeptical about the effectiveness of monetary tightening. U.S. manufacturers report rising input prices, which could be a harbinger of consumer price increases in the coming months.

In terms of geopolitical risks, premiums have fallen since early May as oil supply is fundamentally unaffected by conflicts. The market trend is crucial during the summer peak consumption period, but institutional views vary. OPEC predicts a 2.25 million barrels per day increase in oil market demand this year, while the IEA believes it will only be 1.06 million barrels per day. Valga points out that current indications suggest ample market supply. Refining margins are under pressure, and the crack spread between refined products and crude oil has significantly narrowed. Global consumption expectations are stagnating, and U.S. gasoline consumption is expected to further decrease.

Sevens Report Research analyst Richie believes that concerns about economic recession and stagflation will continue to pressure oil, and dynamics in the U.S. Treasury market remain key to the global economy. Keeping policy rates high for an extended period could increase the risk of economic recession, which is unfavorable for gasoline demand and energy market performance.