The Organization of the Petroleum Exporting Countries and its allies (OPEC+), on Sunday, agreed to extend their production cut agreement until 2025. This decision exceeded expectations and could potentially keep oil prices elevated until the U.S. presidential election in November.
The alliance stated after a ministerial meeting on Sunday that the extension aims to boost weak oil prices amid sluggish demand growth, high interest rates, and increasing production from competitors like the United States.
Currently, oil prices are hovering around $80 per barrel, below the level required for many OPEC+ member countries to balance their budgets. Concerns over slow demand growth in top oil-importing country China, as well as rising oil inventories in developed economies, are putting pressure on oil prices.
The international benchmark Brent crude price has been fluctuating between $91 and $83 per barrel over the past month, far from the unprecedented level of $100 per barrel seen at the end of 2022.
Since the end of 2022, OPEC and its ally countries led by Russia (collectively known as OPEC+) have implemented significant production cuts.
OPEC+ member countries are currently cutting production by 5.86 million barrels per day, approximately 5.7% of global demand. This includes a daily 3.66 million barrels reduction as the official production cut target, known as the collective cut, scheduled to expire at the end of June this year; in addition, it also includes a voluntary 2.2 million barrels daily cut proposed by eight member countries.
The voluntary production cut member countries include Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi Arabia, and the United Arab Emirates.
OPEC+ started implementing a cooperation production cut plan of 3.66 million barrels per day after the fall of 2022. On Sunday, the alliance decided to extend this production cut plan for another year until the end of 2025, and to prolong the voluntary production cut plan of 2.2 million barrels per day for three more months until the end of September 2024.
Starting from October 2024 to the end of September 2025, OPEC will gradually phase out the voluntary production cut plan of 2.2 million barrels per day over the span of a year.
Saudi Energy Minister Abdulaziz bin Salman told Reuters, “We’re expecting better trajectories from lower rates and economic growth…rather than sporadic growth here and there.”
Analysts suggest that the production cut may push oil prices higher in the coming months and will be closely watched leading up to the U.S. presidential election in November. Demand typically peaks in the summer from July to September, but uncertainty in demand will rise afterward.
Currently, crude prices have fallen by about 10% from the peak reached in April due to escalating tensions between Israel and Iran. The efficacy of OPEC+’s decision to extend production cuts in supporting oil prices remains uncertain.
The next ministerial meeting of OPEC+ is scheduled for December 1st.