OPEC keeps cuts in place until end of 2024

OPEC+ agreed to extend its production management until the end of 2024 with new targets that closer reflect members’ actual production capacities. Several members of OPEC+ that announced voluntary cuts in April this year will maintain those cuts until the end of 2024 while Saudi Arabia will provide another cut of 1m b/d in July for at least one month with the potential to extend it over the remainder of 2023.

The production targets for 2024 imply a substantial revision to production baseline levels and all members of the producers’ alliance will agree to a new assessment of their production capacities by mid-way through 2024. The revision to baselines was likely a necessity for OPEC+ to present a decision with a unified voice as several countries who have made heavy investment into upstream projects—like the UAE—had been forced to idle much of their overall capacity.

Lower volumes ahead

We estimate the announced cuts—both the required production targets for 2024 as well as the voluntary adjustments—will amount to a drop in OPEC+ production of about 2.5% in 2024 from 2023 levels. We are assuming for now that Saudi Arabia will maintain its additional 1m b/d cut for July until the end of the year before returning to a 500k b/d reduction from targeted output for 2024. For the UAE, production in 2024 will actually increase by 200k b/d from its voluntarily adjusted level for 2023 of 2.875m b/d as it will intentionally under-perform its quota of 3.219m b/d.

Source: Bloomberg, WAM, SPA, Emirates NBD Research. Note: Saudi Arabia 1m b/d cut in July assumed extended for remainder of 2023.

The length of the agreement is another substantial takeaway from the latest meeting as producers are pledging targets out to the end of 2024 at a time when near-term conditions in the oil market appear to be in flux. In its statement, OPEC+ said it wanted to maintain a “precautious, proactive, and pre-emptive” approach to market management. That opens the door for production changes should conditions warrant it and the statement also indicated that the joint ministerial monitoring committee (JMMC) had the ability to request a full ministerial meeting at any time. That will leave the market on edge, second guessing whether OPEC+ would step in if there is a sharp drop in front month prices or weakening in time spreads or even if there is a tactical moment to squeeze shorts that may have built up according to positioning data.

Impact on balances

The additional 1m b/d cut of Saudi production in July will deepen the market deficit in Q3 and we are for now assuming they hold production at 9m b/d until the end of the year. By the standards of recent years, that is a particularly low level of Saudi oil production but will contribute to a meaningful draw in inventories for the second half of 2023, abetted by countries like the UAE, Kuwait and Iraq adhering close to the voluntary production cuts. An unknown variable is Russia, where production has not shown signs of moving close to the 500k b/d of cuts the country has announced. Russia is part of the OPEC+ deal reached over the weekend and accepted a lower production level for 2024.

A tighter deficit in H2 will support out view of prices improving over the rest of this year, provide that demand comes close to what the IEA has been projecting (roughly 2m b/d y/y of demand growth from Q2 onward). Near-term reaction has been positive with both Brent and WTI futures trading higher in early trading in response to the OPEC+ deal with Brent at about USD 77.50/b and WTI at USD 73/b.