【MACRO Alert】OPEC+ Production Cuts Trigger Oil Price Plunge! U.S. Fuel Consumption Data Becomes New Focus!

On June 2, the OPEC+ meeting announced the extension of the “collective production cut measures” (200,000 barrels per day) until the end of 2025. The “compensatory production cut measures” (approximately 1.65 million barrels per day) will also be extended until the end of December 2025. At the same time, the “voluntary production cut measures” (2.20 million barrels per day) announced in November 2023 will be extended until the end of September 2024. There are plans to gradually phase out the voluntary production cut measures of 2.20 million barrels per day from October 2024 to September 2025.

In terms of production quotas, the UAE increased by 300,000 barrels per day, while Russia and Nigeria increased by 120,000 barrels per day. The Saudi Energy Ministry welcomed Iraq, Russia, and Kazakhstan's renewed commitment to adhere to the OPEC production cut agreement and to submit updated compensation plans for their overproduction since the beginning of this year by the end of June. In addition to the unfavorable demand-side data, this has led to a continued decline in crude oil prices.

The OPEC+ meeting decided to extend the voluntary production cut measures announced in November of last year until the end of September 2024, rather than the market's expectation of the end of the year. The market is concerned that after October 2024, the scale of production cuts by OPEC+ will decrease, potentially putting pressure on the market's supply.. Meanwhile, the ISM Manufacturing Index in the United States in May dropped to its lowest point in three months at 48.7. The U.S. government is also selling nearly 1 million barrels of gasoline reserves, leading to a decrease in crack spreads. The demand for gasoline and diesel in the U.S. decreased month-on-month, coupled with gasoline inventories not declining in May as they have in the past two years, these factors combined have resulted in a significant decline in crude oil prices.

After OPEC+ unexpectedly announced plans to resume some market production this year, crude oil prices plunged, exacerbating the bearish momentum seen in crude oil for several months. Global benchmark Brent crude oil futures fell by 3.4% on Monday, closing just above $78 per barrel; WTI crude oil futures dropped by 3.6%, closing near $74 per barrel. The prices of both of these benchmark crude oil futures are at their lowest points since February.Over the weekend, OPEC+ decided to gradually phase out production cuts starting from October, earlier than market expectations. The cuts will continue in the third quarter, followed by a gradual phase-out over the next 12 months. Analysts are divided on whether this decision will be bearish for crude oil.

Due to reduced geopolitical risks and weak demand, oil prices have been falling over the past two months. The Brent crude oil spot price differential has narrowed to 13 cents, indicating recent ample supply. Ryan McKay of TD Securities stated that the easing of supply risks has had an impact on oil prices and differentials. Goldman Sachs, on the other hand, believes that OPEC+'s decision is bearish because the gradual phase-out of cuts shows that member countries want to restore production. Other analysts also note that high inventories and increased production from non-OPEC countries like the United States further pressure oil prices.

However, OPEC+ has pledged to strictly adhere to the production cuts as they have extended the agreement. If oil prices continue to fall, it is not ruled out that OPEC+ may change its production policies. U.S. crude oil production is constrained by capital spending, geopolitical risks in the Middle East continue to disturb the market, the Houthi rebels are still attacking vessels related to Israel and expanding into the Mediterranean region.

The conflict between Israel and Palestine continues, making it difficult to reach a ceasefire agreement. The United States has restarted its oil strategic reserve plan, releasing 3 million barrels per month. However, the gasoline supply reserve to be released by the US is only 1 million barrels, which is not a large quantity. With the peak season for American car travel just beginning and China implementing economic stimulus policies, the outlook for oil demand is positive. It is not advisable to chase oil prices at this time.

Signs of weakening demand growth have also weighed on oil prices. US gasoline futures fell by over 3% on Monday to a three-month low of $2.34 per gallon. This indicates that US fuel consumption data has become a focus. The US government will release estimates of oil inventories and demand on Wednesday, which will include data on gasoline consumption around Memorial Day weekend (the start of the US driving season).