In a new BMI report sent to Rigzone by Fitch Group, BMI analysts examined “the good, the bad and the ugly” of OPEC+’s new policy.
Looking at the “good”, BMI analysts noted in the report that the rollover of the existing cuts across the third quarter “should significantly tighten the global market balance”.
“The bulk of production in OPEC+ stems from the Middle East and North Africa (MENA) region. Oil demand in this region peaks over the third quarter and the major producers typically curb their exports over the summer months in order to meet heightened domestic demand,” they added.
“As such, holding the current cuts in place will meaningfully reduce the net availability of crude on the global marketplace,” they continued.
This physical tightening of the market could be crucial, the analysts stated in the report.
“Market fundamentals have recently been weakening, as indicated by narrowing term spreads and declines in the Brent dated-to-frontline swap,” they said.
“A fall in GCC exports over the coming months – at a time when global demand is strengthening seasonally – could help to reverse this trend, ultimately boosting Brent,” they added.
The analysts stated in the report that the rollover of the OPEC+ deal to December 2025 and the publishing of an 18-month production schedule for the group’s key producers offers the market an unprecedented degree of forward transparency.
“The OPEC communique also references 2026 production levels, hinting at a further extension of the deal,” the analysts highlighted.
“Iraq, Kazakhstan, and Russia – whose historical compliance has been generally patchy – pledged to fully comply with the deal and compensate for former overproduction (although these pledges are, admittedly, questionable at best),” they added.
“Meanwhile, the group made clear that the scheduled production increases can be paused or even reversed, if market conditions warrant it. Taken together, this should both support prices and promote broader market stability,” they continued.
The Bad
In the “bad” section of the report, the BMI analysts highlighted that the market reaction to the deal “has been very poor, with Brent currently trading at around $77.5 per barrel, down from a close of $81.6 per barrel on May 31, prior to the latest meeting”.
“In some ways this was unsurprising, given that market participants were already pricing in a rollover of the current cuts,” they said.
“Sentiment has also grown increasingly bearish over recent weeks, with traders becoming far more receptive to price action to the downside, than to the up,” they added.
The analysts warned in the report that these losses could reflect concerns over a potential shift in OPEC+ strategy.
“Historically the group has tended to talk up the market. However, the messaging around this most recent meeting was relatively soft,” the analysts said.
“It lacked the Draghi-esque ‘whatever it takes’ tone of previous announcements. In our view, the group is now signaling a firmer intent to sustainably roll back their cuts. Rollbacks have been attempted before, but none have stuck and the group may now feel that is running out of road,” they added.
The analysts pointed out that this does not mean that OPEC+ will never curb its output again.
“In fact, scheduling production increases could make future cuts more impactful,” they said.
“Nevertheless, we believe that the threshold for future cuts has likely been raised,” the analysts added in the report.
The analysts also warned of “simmering tensions within the group”.
“The burden of the cuts has been spread highly unevenly, with Saudi Arabia and the UAE taking on more than their fair share,” they said.
The Ugly
In the “ugly” section of the BMI report, analysts said OPEC+ is well-able to tackle short-run disruptions to the market but added that it is relatively ineffectual in the face of long-run structural change.
“The actions of OPEC+ were critical in supporting the price recovery in the wake of the pandemic, but that was a temporary, exogenous shock to the market,” the analysts stated in the report.
“The technology that enabled the shale revolution represented a structural break. As does the progressive shift away from fossil fuels towards low-carbon and sustainable sources of energy,” they added.
“In a best-case scenario, where OPEC+ manages to return cut barrels to market in line with its schedule, it will still be producing at far lower levels in December 2025 than it was almost a decade previously, when then the Declaration of Cooperation was signed,” they warned.
The analysts also noted in the report that the OPEC members of OPEC+ alone will still have more than four million barrels per day in spare capacity.
“No wonder then, that Saudi Arabia has abandoned its plans to expand its production capacity from 12 million barrels per day to 13 million barrels per day,” they said.
“The ugly truth is that the market has become overly reliant on the ‘OPEC put’ – on the assumption that if prices fall too low, the group will intervene. Removing this support and raising their supply is a near-impossible task, without upsetting prices,” they added.
“Several of these producers – notably in the GCC – are well-placed to compete for demand in the long term, even as the demand pool shrinks,” they continued.
Saudi Aramco and ADNOC in particular are strong contenders for the last producer standing, the analysts said in the report.
“There is little that OPEC can do to mitigate the challenges it now faces,” the analysts warned.
“Historically the oil sector has been highly cyclical: high prices when the market is in deficit dampen demand and incentivize investment, which ultimately leads to a surplus, which saps prices, dampening investment and incentivizing demand, leading back to a deficit,” they added.
“With the ongoing energy transition, the demand cycle is fundamentally altered and companies are far more selective in investing in supply, structurally lowering the global cost curve and widening the gap between the breakeven cost of a marginal barrel of oil and the fiscal breakevens of the OPEC+ members,” they continued.
Rough Start to the Week
In a research note sent to Rigzone on Thursday by the J.P. Morgan Commodities Research team, analysts at J.P. Morgan said oil “had a rough start to the week”.
“Having delayed judgement on Sunday’s OPEC+ announcement through Asian hours and European morning, the market sold off steeply when U.S. traders came in on Monday,” they highlighted.
“Oil prices extended losses on Tuesday: Brent settled at $77.52 per barrel and WTI at $73.25 per barrel, with each down around eight percent from a week earlier, pushing Brent to its lowest in four months and into oversold territory,” they added.
The analysts stated in the note that the market’s verdict on the OPEC+ decision was likely behind the fall, “coming at a time when U.S. manufacturing activity slipped for the second consecutive month in May and job openings fell more than forecast in April, raising concerns that the U.S. economy might be softening more than expected”.
The J.P. Morgan analysts also noted that, “to a large extent”, the market’s reaction was “understandable”.
“The producers’ group extended its 3.6 million barrels per day of supply reductions through 2025, but it also announced plans to gradually unwind 2.2 million barrels per day of voluntary cuts starting in October, subject to market conditions,” they said.
“The alliance also agreed to increase production quota for the UAE to reflect its increased capacity, while also raising quotas for Russia and Nigeria. According to the surprisingly detailed taper path outlined by OPEC, the net result is that over 12 months from September 2024 to September 2025, OPEC+ intends to pump an extra 2.5 million barrels per day of crude over and above its current quotas,” they added.
On paper, this additional production would clearly be bearish for prices, the analysts said in the research note. They added, however, that there are “important details that need to be taken into account”.
“For one, a number of key OPEC producers are already pumping well above their assigned quotas … Second, many OPEC producers are already operating at close to full capacity … Demand growth remains healthy … [and] Inventories … shift to draws in 3Q,” the analysts stated in the note.
“Fundamentally, summer inventory draws should be enough to get Brent oil back into the high $80s-$90 range by September,” the analysts went on to state.
In the note, the J.P. Morgan analysts warned that pressure on prices could build in 2025, “as supply outside of OPEC rises and demand slows in 2025”.
“Our global liquids balance projects a shift from a small 0.3 million barrel per day deficit in 2024 to a much looser 2025,” they added.
BMI is a unit of Fitch Solutions. According to Fitch Group’s website, Fitch Solutions is a leading provider of insights, data, and analytics. J.P. Morgan describes itself as a leading global financial services firm with assets of $2.6 trillion and operations worldwide.
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