The outcome of a meeting this past weekend of major oil producers was somewhat surprising, but they may have expected to see a stronger climb in prices in the wake of Saudi Arabia’s decision to voluntarily cut another 1 million barrels a day from its production level.
Some analysts do not anticipate a major rally following the move, which would be good news for U.S. drivers who aren’t expected to see an extreme rise in gasoline prices at the pump this summer.
OPEC+, which is made up of the Organization of the Petroleum Exporting Countries with de facto leader Saudi Arabia, and the group’s allies — including Russia — agreed Sunday to extend previously agreed production cuts through the end of 2024. Saudi Arabia will also voluntarily reduce its oil production by an additional 1 million barrels a day in July.
The Saudis will “continue doing the heavy lifting of production cuts, hoping that its efforts will reverse the falling price trend in oil markets and boost prices, but the gifts to some OPEC members — at the expense of the others — hint that we could see further cracks within the cartel in the next few months,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said in emailed commentary after the decision. “That’s not a winning setup for OPEC and oil bulls.”
The outcome of the meeting has led to a rise in oil prices Monday, but a somewhat modest one.
On Monday, the front-month August Brent oil contract
BRNQ23,
OPEC+ agreed last October to cut output by 2 million barrels a day. In April, several OPEC+ members followed that up with the surprise announcement of an additional cut of 1.6 million barrels a day — which included a voluntary trim to production from Saudi Arabia of 500,000 barrels a day through year-end.
‘Optimal action’
Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, had suggested to his readers ahead of Sunday’s meeting that OPEC+ could announce additional voluntary output cuts by the group’s large producers only for July, and the Saudis did just that.
“By applying a large output cut on top of the previous reductions, which were already in place, and reevaluating at the end of each month, Saudi Arabia aims to burn the oil shorts and control the narrative” for oil, Alhajji told his readers on Sunday, in a subscription-based article provided to MarketWatch.
OPEC+ took “optimal action” at its meeting, he said. That’s bullish for prices, but it will be met with a “massive response from China, which will withdraw oil from its inventories,” including its petroleum reserve.
“There will be an increase in oil prices “in an environment where Saudi Arabia sets the floor, while China sets the ceiling.” ”
Given that, there will be an increase in oil prices “in an environment where Saudi Arabia sets the floor, while China sets the ceiling,” Alhajji said, adding that he sees prices in the second half of this year still rising “meaningfully.”
‘Underwhelming’ reaction
Overall, the outcome of the meeting “probably exposes some of the flaws and warts of the cartel and the extended cartel than previous agreements,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service (OPIS), a Dow Jones company.
It will be “difficult to referee disputes between the various factions,” he told MarketWatch. Russia has not been complying with its production quotas and that is a “sore point.”
There’s also evidence that production has been rising or will rise in Venezuela and Iran, and some countries like the United Arab Emirates have “grand designs to produce much more oil,” said Kloza. He also believes U.S. Secretary of State Antony Blinken is likely to lobby the Saudi royal family for more oil when he meets with them this week.
Brian Milne, product manager, editor and analyst at DTN, said the UAE’s crude production quota will increase by 200,000 barrels a day in 2024. The nation has a greater production capacity than its 3 million barrel-per-day output quota following years of investment in its oil industry and it has pushed for a higher allotment under the producer agreement, he said.
There’s a trade-off for the UAE increase, said Milne. Oil output quotas for both Angola and Nigeria in 2024 were slashed sharply despite their resistance, he said. The two West African nations have significantly underproduced their quotas so the adjustment will “help rectify the discrepancy.”
Still, OPIS’s Kloza believes that “guaranteeing compliance from various factions, particularly Russia, will be akin to herding cats.”
““Guaranteeing compliance from various factions, particularly Russia, will be akin to herding cats.” ”
Overall, this is “not a game-changing agreement,” Kloza said. “The market isn’t enamored of the moves — even though the Saudis appear to be taking one for the team.”
Summer gasoline costs
With the gain in oil prices a bit tame given expectations for tighter oil supplies, analysts, for now, don’t expect much of a price climb for gasoline at the pump this summer from the outcome of the latest OPEC+ meeting.
The OPEC+ news “may not have rallied prices like crazy, but should fight off downside to [oil] prices over the summer months,” Matt Smith, lead oil analyst, Americas, at Kpler, told MarketWatch. That should keep the market trading “broadly sideways — hence little influence on refined products” including gasoline and jet fuel.
The summer driving season is underway and the average price of gasoline has declined by 3.9 cents from a week ago to $3.51 a gallon, according to data from GasBuddy.
1-month chart of average retail prices for regular U.S. gasoline
GasBuddyThe drop in gasoline prices may be temporary as oil prices are likely to see upward pressure as global supplies “promise to become even tighter,” said Patrick De Haan, head of petroleum analysis at GasBuddy.
A rally in oil prices this week may lift gasoline prices higher as early as mid-week, he said.
Still, how long any rise in gas prices lasts is up in the air, De Haan said, adding that he does not believe motorists need to worry. “Any rise in average prices should be fairly small, and we’re still extremely unlikely to make a run at record [gasoline] prices anytime soon.” GasBuddy shows the average U.S. retail price for regular unleaded reached a record high of $5.034 a gallon in June of last year.
If anything, U.S. drivers should be more concerned about the impact of the Atlantic hurricane season, said Kloza of OPIS.
If there is a price spike this driving season, it will come “thanks to hurricane impacts,” he said.
The Atlantic hurricane season, which officially started on June 1 and runs through November 30, can lead to disruptions in energy production and transportation in the Gulf of Mexico. In late May, the National Oceanic and Atmospheric Administration predicted “near-normal” hurricane activity in the Atlantic this year.
Consumers might have to worry about a 5- to 15-cents-a-gallon potential rise thanks to this OPEC+ meeting, “but any truly apocalyptic damage would have its genesis elsewhere,” Kloza said.
