OPEC+ is meeting this week to discuss when and how to ease ongoing production cuts. The alliance finds itself in a difficult position once again, trying to balance its financial needs with growing competition from non-OPEC producers.
While OPEC+ has not openly acknowledged it, the group wants to maintain relatively high oil prices. Many members rely on prices above $80 per barrel to avoid budget deficits, and for countries like Saudi Arabia, the ideal price is even higher, above $90 per barrel. However, these higher prices are also encouraging production growth from outside the group, particularly from the U.S., Guyana, and Brazil.
OPEC’s Dilemma
OPEC is caught between its need for oil revenue and the increasing supply from non-OPEC countries. For years, OPEC has insisted that its production cuts are not aimed at hitting a specific price, but rather at ensuring “market stability.” However, with Brent crude prices stabilizing just over $70 per barrel in recent weeks, OPEC faces another tough choice.
At its meeting on December 5 (delayed from December 1), the group will decide whether to begin easing production cuts as planned in January. If they go ahead with this, there is a risk that oil prices could fall below $70 per barrel. The supply glut expected in 2024 and weak demand may drive prices even lower. Lower prices could hurt U.S. shale producers, but they would also harm OPEC and Russia, whose economies rely heavily on oil revenue.
An Uncertain Exit Strategy
OPEC’s exit strategy from the production cuts is now more unclear than ever. If the group aims to push U.S. drillers out of the market, as it has tried to do in the past, it could face serious financial consequences. Saudi Arabia, the leader of OPEC+, needs substantial oil revenue to fund its Vision 2030 program, which seeks to diversify the economy away from oil.
The situation is complicated by the fact that OPEC’s production cuts, intended to prop up oil prices, have inadvertently helped increase supply from outside the group. This includes U.S. production, which has been growing rapidly. Last week, Iran’s representative for OPEC, Afshin Javan, wrote a rare column acknowledging that OPEC’s strategy to boost oil prices has actually encouraged higher supply from the U.S. He also highlighted concerns about China’s economic outlook, which could further complicate OPEC’s plans.
Market Conditions and OPEC’s Next Move
Earlier this year, OPEC+ had planned to gradually bring back production in response to market conditions. However, with prices lingering below $80 per barrel, those plans have been delayed. Some analysts suggest that OPEC+ may need to maintain the cuts longer-term if the market fails to respond with higher prices.
The weak fundamentals in the oil market have led to speculation that OPEC+ will delay its planned output increase, which was originally set for January. Saudi Arabia, in particular, is pushing for a delay of between three and six months. The kingdom has also suggested the possibility of additional cuts, though no other members have shown support for this idea.
The Trump Factor
Another factor influencing OPEC+’s decision is the return of Donald Trump to the White House in January. Analysts expect Trump to tighten sanctions on Iran and Venezuela, which could remove a significant amount of oil from the market. If Iran’s supply, mostly directed to China, is taken off the market, OPEC+ would have a reason to ease production cuts.
However, if Trump follows through with his tariff threats, global trade could suffer, potentially reducing the demand for oil and further complicating OPEC’s position.
Looking Ahead
At this week’s meeting, OPEC+ may choose to delay any changes to production cuts until March 2025. This would give the group time to assess how the new U.S. administration’s policies impact the oil market and the global economy.
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