OPEC+ is like a teabag – it only works in hot water. The late Robert Mabro, one of the savviest oil-market observers, liked to say the cartel only got the job done when it was under prolonged financial pain. To judge by its latest actions, OPEC+ has yet to realize it’s inside a warming kettle.
Saudi Arabia, Russia and other oil-producing nations have now agreed to delay by two months a planned output hike that was scheduled to start in October. The delay came after Brent, the petroleum benchmark, fell to one-year low below $75 a barrel.
In the short term, postponing the output hikes until December should support oil prices. By giving up an increase of 180,000 barrels a day in October and November, OPEC would keep the market roughly balanced next quarter, rather than creating a surplus. But looking at the projected balance of supply and demand, OPEC+ is simply kicking the can down a very uphill road.
In two months, the group will have to take another fateful decision. If it wants higher oil prices in 2025, it will have to do far more than delaying the almost 2 million barrels a day of extra production that it penciled it by the end of next year. It will need to cut output outright. Without curbing production, further price drops loom. Brent for delivery next year sits now at little more than $71.50 a barrel, and the price curve is flattening, a sign that traders anticipate plentiful supply.
As a group, however, OPEC+ isn’t remotely ready for cuts. If anything, the timid deal to delay the output hikes by two months, rather than a full quarter, or even indefinitely, indicates strong internal disagreement.
Saudi Arabia wants higher prices even at the cost of lower production; many others think that’s leading to never-ending market share losses. Riyadh is unlikely to convince its allies of the need to cut output unless prices plunge. The kingdom is already struggling to rein in the United Arab Emirates, Iraq, and Kazakhstan, which are all cheating on their production quotas.
Using Mabro’s analogy, the water is tepid. And even this coffee-drinking Spaniard knows that’s not enough for a good cup of tea.
By keeping oil prices artificially high, Riyadh has been subsidizing higher-cost producers such as those in the US shale patch. Sacrificing market share works if one achieves higher prices — but Saudi Arabia is so far getting the worst possible outcome: low production and low prices. Adjusted by inflation, oil prices are about the same as they were 20 years ago. But Saudi Arabia is producing less than it did in 2004.
The situation is unlikely to change anytime soon. Currently, global demand has outstripped supply as the northern hemisphere summer provided a seasonal boost to gasoline and jet-fuel consumption. But in a few weeks, demand will start to drop, as it does every year. With production from non-OPEC countries increasing, the need for the cartel’s oil will decline in the fourth quarter to about 27.2 million barrels a day – about the same as its current output. During the first half of 2025, OPEC would need to produce far less, around 26 million, to keep the market balanced, according to the International Energy Agency. If it doesn’t, global crude stockpiles would increase, depressing prices.
So even if Saudi Arabia and its allies were to agree in December to delay their production hikes — and Thursday’s deal so far keeps the output hikes unchanged from December 2024 until November 2025 — they would oversupply the market during the first half. Lower oil prices would loom in early 2025. Wall Street banks, often oscillating between uber bullishness and ultra bearishness, are warning about sub-$70 a barrel, and telling clients of a risk of $50.
Tactically, OPEC+ is also sending the worst possible message to the market. First, the deal speaks about the gymnastics the group is doing to preserve unity. In private, I’m told, Riyadh, Abu Dhabi, Baghdad, Kuwait City, Moscow and Astana don’t see eye to eye – no matter how much they deny it in public.Second, it’s a belated admission the market doesn’t need the oil the group had anticipated. The Saudis are reputed to have superior information about the market – this time, they failed. And third, it doesn’t address the surplus of the first half of 2025, which would continue to stoke bearish bets.
The only positive for OPEC+ is that the delay would bridge a gap between now and the US election. Next time, the group at least would know who will be the next occupant of the White House, taking into consideration their potential policies.
For the next few weeks, the water temperature will slowly increase. By December, the kettle should be whistling. Then – and perhaps only then – OPEC+ may jump into serious action. But I remain unconvinced that the cartel would coalesce into defending the high price that Saudi Arabia wants.
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