Update on "What will OPEC+ do next?" - June 12

[dan_s]

FEAR of "What will OPEC+ do next?" is one of the 3 primary fears that are headwinds for the oil price.
> FEAR of "Drill Baby Drill" never was a realistic fundamental problem, but since Trump said it hundreds of times leading up to the election the Wall Street Gang spread the fear of it because lower fuel price lowers inflation and the Gang really want the Fed to lower interest rates.
> FEAR of the Tariff War will fade quickly if the U.S. and China really do have a deal. It is really a FEAR of a global recession. I expect that fear will fade when the Republicans finally pass the One Big Beautiful Bill. Just the no tax on tips and no tax on overtime will give a lot of consumers an immediate pay raise. They will spend the extra money and that will stimulate U.S. economic growth. So, will lower interest rates.

Back to OPEC+

This is from Bloomberg online.

About the author: Ben Cahill is director for energy markets and
policy at the Center for Energy and Environmental Systems Analysis, University
of Texas at Austin.

OPEC+ is confusing the oil market -- and not for the first time. Eight members
of the Organization of the Petroleum Exporting Countries and allied producers
agreed to raise output by 411,000 barrels a day in July, matching the output
increases they pledged this spring. But so far, they are failing to deliver. A
glut is more likely to come in the fall rather than this summer.

The OPEC+ decision to raise oil production in a weakening macroeconomic
climate is puzzling. Is it an effort to regain market share and pressure U.S.
shale producers? A means of restoring internal discipline? A way to reset the
table for a new production arrangement? Perhaps it is a bad sign that these
questions, which cropped up in April, still have no clear answers. OPEC+
derives much of its power from its ability to shape the market narrative. Few
are convinced by its current rationale of "healthy oil market fundamentals and
a steady global economic outlook."

Part of the confusion stems from the complicated mix of group-wide and
voluntary reductions in place. Over the past two years, the biggest producers
in OPEC+ have banded together into an informal group dubbed the "Group of
Eight." That group has at times decided to make deeper production cuts than
official OPEC+ quotas call for, in an attempt to bring the market into
balance.

For example, in October 2022, OPEC+ made a collective production cut of 2
million b/d. Six months later, several OPEC+ countries made voluntary
production cuts of 1.16 million b/d, alongside a Russian reduction of 500,000
b/d. In November 2023, the Group of Eight agreed to even deeper voluntary cuts
of 2.2 million b/d.

That last set of production cuts are now being eased with monthly increases.
If the group sticks with the current pace of supply additions, these voluntary
cuts will be phased out by October, at least on paper.

However, there is less to the current production pledges than meets the eye.
In May, OPEC+ fell well short of its slated 411,000 b/d production increase.
Production rose by only about 200,000 b/d, according to a Reuters survey, and
Kpler data show crude exports declined marginally.

That is because some countries are moving in different directions, muddying
the impact of pledged production increases. Iraq, which typically
overproduces, has reduced output; its crude exports have dropped by some
220,000 b/d since February. This is partly a matter of earning goodwill.
Better compliance by Iraq today could lead to favorable treatment in the
future, when new quotas must be decided before groupwide OPEC+ production cuts
expire at the end of 2026.

In contrast, another serial overproducer, Kazakhstan, continues to ignore its
OPEC+ reference production volume. Kazakh officials have made it clear that
the country will prioritize its national interests as it ramps up output from
the Tengiz expansion. At best, Kazakhstan will remain an obstacle to internal
cohesion and discipline. But if tensions over cheating continue to grow, it is
possible that Kazakhstan will simply quit OPEC+.

These patterns will likely hold in July and August. The announced increases in
production should be partly absorbed by stronger domestic seasonal demand in
OPEC+ countries, as Saudi Arabia and some of its neighbors ramp up direct
crude burn for power generation. Countries like Kazakhstan and the U.A.E. have
also been overproducing for months, so the scheduled ramp-up papers over
existing volumes. And OPEC states that the current arrangement "will provide
an opportunity for the participating countries to accelerate their
compensation." In other words, they may under-deliver on an unrealistically
high production quota.

But even if the group is falling short of output targets, it is placing
pressure on non-OPEC production by signaling a tolerance for lower oil prices.
Signs coming from the U.S. must be encouraging to OPEC+ ministers. West Texas
Intermediate prices in the $60-$65 per barrel range have led shale producers
to drop rigs, trim capital expenditure, and take defensive measures to ensure
investors that dividends will be protected. There is growing speculation that
shale output will fall this year -- and indeed the U.S. Energy Information
Administration has just forecast a plateau and decline in U.S. crude oil
production.

OPEC+ may believe that the market will shift in its direction come this fall.
Non-OPEC output may disappoint, led by a contraction of U.S. shale. Failed
peace negotiations over Ukraine could lead to stronger U.S. sanctions on
Russia, which would curtail exports and tighten the market. And most of all,
the trade tensions that exploded in April could ease if President Donald Trump
backs down from his worst tariff threats.

For many months, the market has discounted potential supply threats from
sanctions and tensions in the Middle East -- although this is suddenly
changing with the withdrawal of some nonessential U.S. personnel in the region
amid rising tensions with Iran. Oil prices briefly climbed above $70 per
barrel on the news. Arguably, the oil market is now discounting the prospect
of an economic rebound and stronger demand. Perhaps this will be the surprise
that vindicates OPEC+, whose demand forecast for 2025 remains notably higher
than other agencies.

For now, the fourth quarter looks like the moment of truth for OPEC+. The
Group of Eight continues to meet monthly to review market conditions and
reserves the right to pause or cancel supply additions. But if the group
extends supply additions into the fall, even in the face of an oversupplied
market, it will signal that OPEC+ is digging in and preparing to outlast the
competition.
---------------------------------
MY TAKES:
1. Saudi Arabia controls OPEC+ and it will not allow the oil price to stay in the low $60s.
2. Just maybe, when Trump was recently in Saudi Arabia he told MBS what he is going to do to Iran if they do not agree to totally give up their uranium enrichment program. Saudi Arabia does not want Iran to get a nuke.
3. Low oil prices lead to less supply, which increases the oil price, which leads to more upstream spend on finding and developing new oil supplies. It is a cycle that I've seen seven times. History will repeat itself.
4. Demand for oil will keep going up by a million bpd per year way past 2030. When it is confirmed that U.S. oil production is on decline, the price of oil will go up.
5. The Age of Cheap Oil ended 50 years ago. The "Right Price" for oil is $75 to $85. It will go back to that range when the FEAR fades.


Join me on our June 17th webinar at 11AM CT.

[dan_s]

Crude oil prices dropped back slightly on Thursday, after jumping by 4% on Wednesday to hit the highest in two months on the news that the U.S. was pulling out its staff from the embassy in Baghdad. The drop was driven by profit-taking, but bullish sentiment remains.

At the time of writing, Brent crude was trading at $68.95 per barrel, with West Texas Intermediate at $67.41 per barrel, after on Wednesday Iran’s defense minister threatened strikes on U.S. bases in the region in case the nuclear talks with Washington failed.

“The market wasn't expecting this big geopolitical risk,” Price Futures Group analyst Paul Flynn said, as quoted by Reuters.

The market did brace for Israeli strikes on Iran, after reports emerged earlier this year that Tel Aviv was considering such a move more seriously than before. Those reports also fueled a rally in oil prices.

There is also the matter of fundamentals. “Greater oil demand within OPEC+ economies – most notably Saudi Arabia – could offset additional supply from the group over the coming months and support oil prices,” Hamad Hussain from Capital Economics said in a note, as quoted by Reuters earlier today.

Summer is peak demand season in the Middle East because of the heat, which drives peak air conditioning use. That goes counter to reports that global oil demand growth is weakening, and warnings that the market would swing into a surplus in the second half of the year.

World oil demand rose by 990,000 barrels per day in the first quarter of 2025, but the remainder of the year will see demand growth at just 650,000 bpd, the International Energy Agency said in its latest monthly report on oil, citing record sales of electric cars and weaker economic growth globally. As a result, the IEA put its full-2025 oil demand growth forecast at 740,000 barrels daily.

By Irina Slav for Oilprice.com