In the coming weeks, Saudi Arabia and its OPEC⁺ allies face a crucial decision about whether to proceed with planned production increases starting in October or to postpone them due to an uncertain economic outlook.
Recent declines in front-month Brent futures prices, calendar spreads, and refinery margins have highlighted concerns about the future of petroleum consumption, underscoring the risk of making the wrong decision.
Boosting production despite downward revisions to consumption growth, and continued output increases from competitors in the United States, Canada, Brazil, and Guyana, could lead to another build-up of inventories and a slump in prices. However, postponing the increase could result in losing more market share to Western Hemisphere rivals and may encourage some OPEC⁺ members to unilaterally increase their output.
Saudi Arabia and other OPEC⁺ members have been enforcing three separate tranches of production cuts since late 2022 to drain excess petroleum inventories and support prices. All OPEC⁺ members are supposed to participate in an official collective cut of 2 million barrels per day, agreed upon in October 2022 amid uncertainty about the economic and oil market outlook.
Additionally, some members are implementing an extra voluntary cut of 1.66 million b/d agreed upon in April 2023 and another voluntary cut of 2.2 million b/d agreed upon in November 2023 to stabilize the market.
In June 2024, ministers agreed to gradually unwind the last of these voluntary cuts, starting in October 2024 and completing by September 2025. They also agreed to allow the United Arab Emirates to increase its output by an additional 300,000 b/d, starting in January 2025 and ending by September 2025.
According to this plan, OPEC⁺ production is set to rise by approximately 180,000 b/d monthly in Q4 2024 and by 210,000 b/d monthly in the first nine months of 2025. However, these increases were described as conditional, and could be “paused or reversed subject to market conditions.”
OPEC⁺ now needs to decide whether to proceed with these increases, modify, or postpone them, given renewed concerns about global economic health and oil demand.
Oil prices and spreads are currently similar to, or weaker than, they were when ministers agreed to the second set of voluntary cuts in November 2023. Inflation-adjusted front-month Brent futures have averaged $79 per barrel in August 2024, down from $84 in November 2023.
Brent’s six-month calendar spread has shown an average backwardation of $2.50 this month, slightly stronger than $1.63 in November.