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The Organization of the Petroleum Exporting Countries (OPEC) and allies, including Russia, are known collectively as OPEC+ and will meet on June 2 to discuss their joint oil production policy. Analysts are divided over whether the oil-producing group will extend voluntary oil output cuts of 2.2 million barrels per day.
OPEC+ is working to agree on the oil production capacity for its member countries by the end of 2024. This has created tensions in the past as each nation’s output target is calculated from its notional capacity, according to news agency Reuters. OPEC+ members tend to push for higher capacity to get higher output targets after the percentage cut required by the group is factored in.
OPEC+ has been curbing output to support the upside in prices. However, commodity analysts have highlighted that the oil market is currently over-supplied, especially because of record-high crude output from the US, which has limited the upside swing for Brent crude prices so far this year.
Mohammed Imran, Research Analyst at leading domestic brokerage ShareKhan by BNP Paribas, in an interview with Mint’s Nikita Prasad in March 2024, said that crude oil prices are weaker because of the current ‘oversupply’ in the oil market. Imran added that OPEC is ‘artificially’ curtailing oil production and losing its market share to maintain Brent above $80 per barrel.
Here’s why OPEC+ nations clash on output policy
Saudi Arabia, OPEC’s de facto leader and the world’s third-largest producer, said that countries with expanded capacity should be rewarded for their investment. The countries that have built more capacity such as the United Arab Emirates (UAE) would like to use some of it to get a return on their investment.
Other countries such as Nigeria have struggled to meet their existing targets due to a lack of investment and maintenance. Even if countries cannot hit their targets, they do not like to see their own notional capacity cut by OPEC+ because that could mean a lower production quota. In December 2023, Angola quit OPEC after arguing it was assigned a lower capacity than it deserved and would have to make deeper output cuts than needed.
“As the largest recipient of Angolan crudes, Asia will generally benefit from Angola’s oil supply now as it will be free of restrictions since they are now outside of OPEC,” said Kang Wu, global head of oil demand research, S&P Global Commodity Insights.
OPEC has a long history of distrust when it comes to members submitting their own data, whether production or capacity, according to Reuters. In June 2023, OPEC+ lowered production targets for Nigeria and Angola after they failed to meet previous targets because of underinvestment and security issues, which actually triggered Angola’s eventual departure. The June 2023 meeting also raised the UAE’s output targets.
Amit Goel, Co-Founder & Chief Global Strategist, Pace 360 said, ‘’Some OPEC countries are limiting output because they exceeded their production quotas in the last few months. This includes Iraq, Nigeria, and the UAE. With demand holding up and growing in CY 24, the crude oil market faces a deficit of almost one million barrels a day.”
‘’Given all these factors, we do not anticipate any significant downside in crude oil shortly. However, we do not foresee Brent crude reaching USD 100 levels, as we anticipate that OPEC may expand output by 0.5 million barrels per day if the crude oil market continues to be in deficit. Hence, our base case is for crude to trade in a range from $85 to $95 levels in the near future,” added Goel.
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Published: 28 May 2024, 10:39 PM IST