The Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, held a top-level meeting of ministers on Wednesday to discuss output policy. As expected, the group decided to keep the current output targets unchanged, as the global crude oil market is almost exactly where the exporter group wants it. The voluntary production cuts of 2.2 million barrels per day (bpd), led by Saudi Arabia and Russia, will remain in place until at least the end of June, joining the existing 3.66 million bpd of cuts agreed in 2022. However, the committee did note that some countries had been over-producing and had undertaken to increase compliance.
Crude oil prices have rallied in recent months, with benchmark Brent futures hitting a six-month high and coming within one cent of $90 a barrel during Wednesday’s trade. Lower production from OPEC+, tensions in the Middle East from the Israel-Hamas conflict, and signs of stronger demand have all contributed to Brent’s rally from a low of $72.29 a barrel on Dec. 13 to the close of $89.35 on Wednesday.
While OPEC+ doesn’t formally target an oil price level, it’s believed that most of the member countries currently favour a price closer to $90 a barrel than the $70 levels from late last year. With the price now at that level, the challenge for OPEC+ is getting $90 to act as an anchor around which the price can trade with the usual daily volatility. The risk is that $90 a barrel is surpassed and crude heads back toward $100, which is likely to fuel a new round of inflation in importing countries, as well as hurting anticipated demand growth. Brent averaged about $82.10 a barrel in 2023, so any level well in excess of that will add to inflationary pressures and make monetary easing by central banks all the harder to deliver.
Stronger oil prices may also crimp demand, especially in the price-sensitive developing economies in Asia, the world’s top importing region. While Asian crude demand is robust, the same can’t be said for its refinery margins, which have been squeezed by higher oil prices that haven’t been matched by price increases for refined products. The profit margin on turning a barrel of Dubai crude into products at a typical Singapore refinery dropped to a four-month low of $4.22 a barrel on April 2, before recovering slightly to end at $4.33 on Wednesday. The margin has shrunk 56% since the high so far in 2024 of $9.91 a barrel, reached on Feb. 13.
The question for the market is whether higher crude prices and under pressure refining margins will result in Asian import demand growth weakening, or whether the economic recovery story in China and the ongoing strength in India will be enough to keep demand robust. While recent history suggests that China tends to trim imports when its refiners believe prices have risen too high, too quickly, any reduction in imports by China comes with a lag to movements in prices as it takes around two months from the time oil is bought for it to physically arrive at a Chinese port.
In summary, OPEC+ has decided to keep the current output targets unchanged, and voluntary production cuts of 2.2 million bpd will remain in place until at least the end of June. Crude oil prices have rallied in recent months, with Brent futures hitting a six-month high, and OPEC+ members seem to favour a price closer to $90 a barrel. However, higher crude prices and under pressure refining margins may result in Asian import demand growth weakening. The economic recovery story in China and the ongoing strength in India will be closely watched to determine the future of crude oil demand.