On the evening of the 4th Beijing time, the OPEC+ ministerial meeting of the oil-producing countries organization was held in Vienna. Negotiations on further capacity cuts to support the market did not go well, and the parties eventually agreed to extend the production cut agreement until 2024, with Saudi Arabia cutting an additional 7 million b/d in July.
Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with the first financial reporter that after several rounds of production cuts, OPEC+ has disagreement on the need for further action, "At present, crude oil prices do not fully reflect the fundamentals, and the next direction of the US and European economies has become very important, China's economic recovery is also critical to the recovery of market demand, and stabilizing the market is inseparable from the cooperation between Saudi Arabia and Russia." ”
The meeting was full of twists and turns
OPEC+ crude oil production accounts for about 40% of the world's crude oil production, which means that its policy decisions often have a significant impact on oil prices. On April 4, Saudi Arabia and a number of OPEC+ oil producers announced an additional production cut of nearly 2.5 million barrels from May, shocking the market, and international oil prices rebounded by nearly 115%. However, as recession fears rose, crude oil futures have completely erased gains and fallen to their lows for the year.
Given the recent pressure on oil prices and the potential risk of oversupply, OPEC+ has once again put production cuts on the table. Due to significant differences among member States on the calculation of quotas and benchmarks, the start of formal negotiations was delayed by almost four hours from the original plan.
The media quoted sources as saying that the issue of production cuts has been strongly opposed by African member countries. Countries such as Nigeria and Angola have long been unable to meet their production quotas due to investment, technology and other factors, and are very unhappy with OPEC+'s proposal to cut the benchmark, because the new target may cause real capacity loss. At one point, the talks reportedly stalled with the departure of some African representatives.
In the end, all parties reached a difficult agreement on postponing production cuts and adjusting capacity quotas for 2024. According to a statement released on OPEC's official website, OPEC+ production capacity next year will be 4046.139 million b/d, 3.<> million b/d less than the current output.
The first financial reporter summarized that Russia, Angola and Nigeria will sharply reduce production targets next year, Congo, Equatorial Guinea, Azerbaijan, Malaysia and Sudan quotas have also been slightly adjusted, and only the UAE quota has been raised by 20,<> barrels per day.
Since the start of a new round of production cuts in November, OPEC+ has raised capacity cuts to nearly 11 million b/d, or about 500% of global energy demand. In its statement, OPEC pledged to continue to maintain a stable oil market and follow a cautious, proactive and preemptive approach. OPEC+ will meet at any time if necessary to address market developments.
Internal cracks are visible
Saudi Arabia's initiative to reduce production is one of the few outcomes of this meeting. Saudi Arabia, the world's largest producer, announced it would implement an additional 7 million b/d of production cuts in July, which would keep production at 100 million b/d during that period. The measures may be further extended depending on the situation, and Saudi Arabia sees this as a measure to support OPEC+ to maintain market stability.
It also reflects the current fragmentation within the alliance of oil producers, with the exception of Saudi Arabia generally having reservations about further production cuts during the year.
It is worth noting that on the eve of this OPEC+ meeting, Saudi Energy Minister Abdulaziz bin Salman issued a warning to market bears, which was widely seen as a potential signal for further production cuts.
Varga told CBN that bears began to control the market, macroeconomic drivers such as the banking crisis, economic uncertainty caused by expectations of further interest rate hikes by the Federal Reserve triggered investors' concerns on the demand side, and the premium structure of futures contracts was damaged. According to data from the Intercontinental Exchange (ICE) and the US Commodity Futures Trading Commission (CFTC), bulls have pulled out aggressively.
For Saudi Arabia, low oil prices will severely affect the country's finances and is a major blow to Saudi Crown Prince Mohammed bin Salman's ambitious vision plan. According to official data, Saudi Arabia recorded a fiscal deficit of $7 million in the first quarter. The latest forecast from the International Monetary Fund (IMF) said that the country's gross domestic product (GDP) growth will plummet to 7.2022% from 8.7% in 3, requiring $1.80/barrel oil price to balance the budget, which is a 90% increase from the previous forecast.
However, unlike before, Russia is not on the same side as Saudi Arabia this time. Russian Deputy Prime Minister Alexander Novak later said he did not think OPEC+ needed further production cuts, which once triggered a short-term plunge in oil prices. As a result, reports of discord between the two oil-producing countries have frequently been reported, and some foreign media have said that tensions between Saudi Arabia and Russia are intensifying, as Russia continues to send large quantities of cheap crude oil to the market, undermining Saudi Arabia's efforts to raise prices. In addition to Russia, important producers supporting maintaining quotas include Iraq and the United Arab Emirates.
Varga believes that Russia's position should not come as a surprise. "Given that fundamentals will tighten later this year and the outlook for the oil market is optimistic, it makes sense to maintain policy stability."