Why OPEC+ Failed To Put $80 Floor Under Oil Prices

• Oil hit a four-month low, and Brent Crude prices slipped below $80 per barrel for the first time since early February.
• Third-quarter demand and market balances could be tempting for a reversal of the cuts from October, but OPEC+ is likely to consider balances for Q4 and beyond.
• ING analysts Patterson and Manthey: The sell-off in oil this week is overdone.

For years, market participants have been lamenting the lack of detailed communication from OPEC+ on the group's intended production beyond the following three months. This weekend, the alliance gave them a full timetable of planned production levels until September 2025. The oil bulls were disappointed.  

The key disappointment was the plan to start unwinding some of the extra voluntary production cuts as early as October this year.

While OPEC+ extended most output reductions into 2025, it said it could begin unwinding some voluntary cuts after the end of the third quarter of 2024—subject to market conditions.

Most analysts see the OPEC+ alliance's announcement this weekend as bearish for oil prices toward the end of the year because of the plan to begin unwinding the cuts. But most analysts don't think there would be market conditions for the group to begin gradually adding supply in the fourth quarter of 2024.

OPEC+'s announcement of a detailed plan for its production well into 2025 coincided with a bearish sentiment that had already taken hold of the market, stemming from fears of weaker-than-expected oil demand in the near term.

The prospect of sluggish demand growth below OPEC's estimates of 2.25 million bpd growth in 2024, coupled with the plan to potentially start tapering the cuts as early as this year and a 300,000-bpd boost to the UAE's quota next year, sent oil prices tumbling this week. Related: Occidental Joins Berkshire In New Lithium JV

Oil hit a four-month low, and Brent Crude prices slipped below $80 per barrel for the first time since early February.   

Goldman Sachs said that the OPEC+ plan to start bringing back some production is negative for oil prices as it shows producers' desire to pump more crude as soon as the market conditions allow.

"The communication of a surprisingly detailed default plan to unwind extra cuts makes it harder to maintain low production if the market turns out softer than bullish OPEC expectations," analysts at Goldman Sachs wrote in a note carried by Reuters.

"As a result of the bearish meeting, and given recent upside surprises to inventories relative to our expectations, we now see the risks to our $75-90 range for Brent as skewed to the downside," Daan Struyven, head of oil research at Goldman Sachs, said. 

TD Securities commodity strategist Ryan McKay wrote in note cited by Bloomberg, "The easing of supply risk premia has already been weighing on prices and spreads, and the OPEC agreement has done little to turn that tide."

Mukesh Sahdev, Senior Vice President and Head of Oil Trading/Downstream Solution at Rystad Energy, commented that, "The bottom line is that the OPEC+ math does appear to be an OPAQUE math."

"It is fair to acknowledge that OPEC+ effort is commendable in keeping oil prices in a stable range despite geopolitical rifts in a super election year," Sahdev added.

However, OPEC+ is likely to consider fundamentals beyond the third quarter, and it is "unlikely to find support to unwind cuts in near term."

Third-quarter demand and market balances could be tempting for a reversal of the cuts from October, but OPEC+ is likely to consider balances for Q4 and beyond, Sahdev says. These balances, according to Rystad Energy, are expected to be flat demand growth in the last quarter of the year, a decline in crude demand at refineries, and nearly 1 million bpd growth in non-OPEC+ supply.

"2025 fundamentals do not provide a strong signal for an OPEC+ strategy reversal," Sahdev noted.

Helima Croft, head of global commodity strategy at RBC Capital Markets, said the market shouldn't get too bearish on the OPEC+ announcement as the cut reversal is subject to market conditions and may not begin this year at all.

"While any signal to add back barrels will be seized on by market bears, we think it is important that the taper timeline execution will be data dependent and subject to review at summer's end," Croft wrote in a note carried by MarketWatch.

RBC Capital Markets sees the OPEC timeline "as something of an aspirational taper schedule, not a binding course of action," the strategist added.

The sell-off in oil this week is overdone, ING's commodities strategists Warren Patterson and Ewa Manthey wrote in a Wednesday note.

"The decision from OPEC+ warrants relatively more weakness further along the forward curve (we currently see a small surplus in 2025 with the gradual return of OPEC+ supply), but speculative money will be largely positioned in the nearby prompts," they said.

Technical signals also suggest that the oil market is now entering oversold territory, but weakness in refinery margins remains a concern for the market, ING reckons.

By Tsvetana Paraskova for Oilprice.com

More Top Reads From Oilprice.com:

• Oil Price Plunge Hits BP and Shell Shares
• What Does OPEC’s Strategy Shift Mean for the Oil Market?
• Saudi Aramco’s $12 Billion Share Sale Quickly Sells Out, but Who is Buying?