OPEC+ discloses detailed "exit production cut" roadmap, Goldman Sachs calls it bearish for oil prices!

OPEC+ agrees to extend production cuts, can oil prices stabilize?

At the OPEC+ ministerial meeting on Sunday, reports indicate that OPEC+ has reached a preliminary agreement to extend its production cut policy until the end of September 2025, gradually phasing out voluntary additional cuts starting from the end of September 2024.

The specific details include:

• The collective production cut plan of 3.66 million barrels per day originally set to expire at the end of 2024, now extended until the end of 2025.
• The "voluntary production cut" plan of 2.2 million barrels per day implemented by 8 OPEC+ member countries including Saudi Arabia, the UAE, and Iraq, originally set to expire at the end of June this year, now extended until the end of September this year.
• From October 2024 to September 2025, key OPEC+ member countries can gradually phase out the 2.2 million barrels per day production cut plan.
• The UAE's official production quota will be increased by 300,000 barrels per day, starting from January 2025, and by September 2025, the production quota will increase from the current 2.9 million barrels per day to 3.519 million barrels per day.
• It is expected that global oil demand will increase by 2.2 million barrels per day this year.

According to related data forecasts, as the 8 key OPEC+ member countries gradually phase out the "voluntary production cut" plan, their daily production levels are expected to rebound.

What does this mean for oil prices?

Against the backdrop of high interest rates and inflation, sustained weak global demand, and rising production from competitors, OPEC+ has implemented a series of complex production cut measures since the end of 2022.

Can this extended production cut plan boost oil prices as expected?

Goldman Sachs believes that the outcome of the OPEC+ meeting is bearish for the market, and the price of Brent crude oil may fall below the range of $75 to $90.

"Although the clear production cut plan further reduces the possibility of an all-out price war and supports the view that oil prices will stabilize within a certain range, the downside risks in this range are significant at the moment."

Goldman Sachs points out:

• OPEC+ plans to curb oversupply through production cuts, but until 2025, 8 countries including Saudi Arabia, Iraq, and Russia may gradually increase production.
• It is expected that global oil demand will increase by 1.5 million barrels per day this year, lower than OPEC+'s forecast.

The market also appears to be bearish on oil prices.

Current futures trading position data shows that WTI oil prices are expected to be $73 per barrel next year, a decrease of over 5% from current levels. According to the U.S. Commodity Futures Trading Commission (CFTC), in April, fund managers in New York reduced net long positions in WTI futures main contracts by 20.6% and increased short positions by 97.5% Senior oil analyst Gary Ross said that investors had already felt uneasy about the oil market:

"I'm not sure this agreement will make them feel any safer."

Meanwhile, some OPEC+ member countries are still "secretly increasing production." Data from Platts, a subsidiary of S&P Global, shows that Russia, Iraq, and Kazakhstan exceeded production by 200,000 barrels per day, 240,000 barrels per day, and 72,000 barrels per day respectively in April this year.

However, some believe that OPEC+'s decision may provide some support to oil prices. Raad Alkadiri, a senior researcher in energy security and climate change at a Washington-based research institution, believes that "the oil market will not be disappointed with this plan."

The agreement is "highly flexible" and can still be adjusted in the future

Some media outlets also pointed out that considering that some member countries can "gradually exit" the voluntary production cut plan, the agreement actually leaves a lot of room for future adjustments.

Goldman Sachs stated that production increases can be paused due to market conditions, and similarly, they can be resumed due to market conditions:

"If the market shows weakness and demand does not meet OPEC+'s expectations, then the production cut plan will be difficult to sustain."

Alkadiri also mentioned:

"Even if market conditions change, OPEC+ can always change its policies."

As of the time of writing, Brent crude and WTI crude continued to decline, with Brent falling by 0.15% to $80.99 per barrel and WTI falling by 0.12% to $76.9 per barrel.