Oil Tumbles On "Negative" Provision In OPEC Cutback Extension Decision

by Ship & Bunker News Team
Monday June 3, 2024

Even though the Organization of the Petroleum Exporting Countries (OPEC) on Sunday did as was widely expected and hoped for by agreeing to extend most of its oil output cuts into 2025, the particulars of its decision caused concern throughout the analytical community, and as a result oil prices on Monday tumbled by over 3 percent to their lowest closes since February.

Brent settled down $2.75, or 3.4 percent, at $78.36 per barrel, while West Texas Intermediate settled down $2.77, or 3.6 percent, at $74.22 per barrel.

The cause of consternation was OPEC's provision of leaving room for voluntary cuts from eight members to be gradually unwound from October onward.

OPEC is currently cutting output by 5.86 million barrels per day (bpd), including 3.66 million bpd of cuts that were due to expire at the end of 2024 (which will be extended for another year), and voluntary cuts by eight members of 2.2 million bpd, expiring at the end of June 2024 (they will be prolonged until this coming September).

Prince Abdulaziz bin Salman, energy minister for Saudi Arabia, explained the cartel's mindset: "We are waiting for interest rates to come down and a better trajectory when it comes to economic growth ... not pockets of growth here and there."

Goldman Sachs viewed this as a negative development for oil prices, because the phasing out of the voluntary cuts supposedly demonstrated a strong desire by some members to restore output despite increases in global inventories.

It stated, "The communication of a surprisingly detailed default plan to unwind extra cuts makes it harder to maintain low production if the market turns out softer than bullish OPEC expectations."

Ryan McKay, a commodity strategist at TD Securities, wrote in a note, "The easing of supply risk premia has already been weighing on prices and spreads, and the OPEC agreement has done little to turn that tide."

By contrast, Helima Croft, head of global commodity strategy at RBC Capital Markets, was one of the few analysts tapped for comment by media who seemed unfazed by OPEC's strategy: "They were pretty clear that this is going to be data dependent, [and] as we get to the end of August, if the fundamental picture looks worse than what we have now, they would pause that addition."