When officials from many of the world’s largest oil-producing countries meet on Sunday, their options for managing the market appear constrained. Over the past two years, the group known as OPEC Plus has agreed to successive cuts in oil output, with the expectation that these trims would be temporary. However, these cuts have started to seem more permanent as prices remain relatively subdued. Analysts suggest that relaxing the cuts now could risk further depressing prices in what seems to be a soft market.
This situation is frustrating for oil producers like Iraq and the United Arab Emirates, who could benefit financially from pumping more oil. Richard Bronze, head of geopolitics at Energy Aspects, a research firm, noted, “That’s where the discomfort for some members comes.
Bronze expects OPEC Plus to extend voluntary cuts of 2.2 million barrels a day by eight of its members, including Saudi Arabia and Russia, at the upcoming meeting. Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman, known for his surprise moves, will lead the meeting, so other outcomes are possible.
These cuts, originally set to end in June, add to previous reductions. The complexity of these multilayered measures has made them difficult for even close market watchers to follow. “Everyone just loses track,” said Bronze.
Since the pandemic recovery, substantial growth in output from countries outside OPEC Plus, such as the United States, Guyana, Brazil, and Canada, has pressured producers like Saudi Arabia to curb supplies to maintain prices. Simultaneously, demand has not increased sufficiently to absorb these supplies.
Currently, Saudi Arabia produces about nine million barrels a day, approximately 1.5 million barrels a day below 2022 levels and three million barrels a day below its capacity. This year, Saudi officials announced halting efforts to increase production capacity at Saudi Aramco, the national oil company, deeming it futile to spend billions on expansion if OPEC Plus agreements and other factors prevent selling the additional oil.
On Thursday, the Saudi government and Saudi Aramco, largely government-owned, announced plans to sell up to $12 billion in shares on the Riyadh stock exchange. This multibillion-dollar sale, representing just over 0.6 percent of Aramco’s issued shares, is one of the largest share offers since the company’s high-profile initial public offering in 2019.
In recent market signals, prices fell after tit-for-tat attacks by Israel and Iran did not disrupt oil supplies. Prices recovered modestly in anticipation of the OPEC Plus meeting, with analysts predicting increased demand from summer travel in the Northern Hemisphere to temporarily support prices.
Despite challenges, OPEC Plus members have so far chosen to stick together, likely fearing that disbanding could lead to a steep drop in oil prices and revenues. However, there are signs of unrest within the cartel. Angola exited OPEC in December, citing that membership no longer served its national interest. Both the UAE and Iraq have been producing oil significantly above their agreed levels. Iraq’s oil minister initially stated in May that the country would not agree to new cuts, according to Reuters, but later affirmed Iraq’s commitment to cooperate with OPEC Plus.
Gary Ross, a veteran oil analyst and current CEO of Black Gold Investors, a trading firm, highlighted the increasing number of vehicles powered by electricity, natural gas, and fuels derived from vegetable oils as factors influencing investor sentiment away from oil.
The oil market’s current state reflects the balancing act OPEC Plus must perform to maintain stability and profitability. As they prepare for Sunday’s meeting, the focus will likely remain on extending cuts and managing production levels to navigate these uncertain times.
