OPEC+ Announces Extension of Oil-Production Cuts, Indicating a Patient Approach to Recovering Lost Volume
In a move that was widely anticipated by the market, OPEC+ has announced that it will extend voluntary production cuts into the second quarter. This decision, made by the Organization of the Petroleum Exporting Countries and its allies, including Russia, signals a patient approach to restoring lost volume in the oil market.
According to a statement from Saudi Arabia’s official press agency, Saudi Arabia will extend its voluntary production cut of 1 million barrels a day until the end of the second quarter, in coordination with some OPEC+ participating countries. This additional cut is in addition to the 500,000 barrels a day cut previously announced by Saudi Arabia, which runs until the end of this year. The decision to extend the cuts does not come as a surprise to analysts, but it does send a message of cohesion within the group and confirms that they are not in a hurry to return supply volumes.
Giacomo Romeo, an analyst at Jefferies, commented on the decision, stating that it supports the view that when supply volumes are finally restored, it will be a gradual process. Romeo expects this to happen in the third quarter of this year, as demand gets seasonally stronger. However, he also notes that an extension beyond the second quarter remains uncertain and will be a topic of discussion at the next meeting of OPEC+ officials in early June.
The decision to extend production cuts comes after OPEC+ implemented cuts in late November last year. Since then, oil prices have risen but remain well below the highs seen in 2023. Even recent geopolitical tensions, such as the Israel-Hamas conflict and the potential threat to oil supplies from the Middle East, have failed to push crude prices back towards those highs.
Despite this, crude oil prices rallied last week. May Brent, the global benchmark, ended Friday at $83.55 a barrel on ICE Futures Europe, up 8.5% so far this year. However, it still remains more than 13% below its 52-week high set in September. May West Texas Intermediate crude, the U.S. benchmark, ended Friday at $79.97 a barrel on the New York Mercantile Exchange, up 11.6% in the year to date but 14.6% below its 52-week high.
The extension of production cuts by OPEC+ reflects their cautious approach to balancing the oil market and ensuring a gradual recovery of lost volume. The decision also highlights the ongoing uncertainty surrounding the outlook for oil demand. As the world continues to grapple with the effects of the pandemic, OPEC+ is taking a patient stance, not rushing to flood the market with excess supply. The next meeting of OPEC+ officials in June will be closely watched as discussions around further extensions will take place. Until then, the market will continue to monitor oil prices and global demand indicators to gauge the timing and pace of recovery in the oil industry.
