As OPEC+ has reverted to its traditional semi-annual cycle of meetings, there was some degree of anticipation ahead of OPEC+ convening in Vienna in early June for the first of their two full ministerial meeting this year. In the end, however, most members stayed at home and joined a virtual meeting, while those OPEC+ members that have signed up to additional voluntary cuts, met in person in Ryad. This further delineated the core group of eight members (Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman) with Saudi Arabia at the helm, from the other members of OPEC+.
Two press releases were issued. The main OPEC+ member meeting held virtually, agreed to 2025 compulsory production targets that included an extra 300 kb/d for the UAE’s quota. Meanwhile, the core members that signed up to additional voluntary cuts agreed that while those cuts will be rolled to the end of September, they will then be phased out over the following 12 months until September 2025.
Oil sold-off following the meeting on scepticism the market could absorb such an increase and Brent reached a low around 77 \$/b. There followed an abrupt recovery after the Saudi Energy minister pointed out a caveat in the press release which made clear that members might slow down or stop planned production increases. Since then, Brent has hovered around 85 $/b.
Looking at the fundamentals of the market, in its latest monthly report, the International Energy Agency (IEA) revised down its 2024 demand figures by 100 kb/d to 103.1 and cut 2025 demand by 200k to 104.0 mb/d. At the same time, the non-OPEC supply figures were increased by 100 kb/d in both 2024 and 25. This led to a fall in the amount the IEA estimates that OPEC will need to produce to balance the market by 200 kb/d this year, down to 27.2 mb/d and by 300 kb/d in 2025 down to 26.4 mb/d. These figures compare with the IEA’s June OPEC output estimate of 27.2 mb/d suggesting the market will be balanced this year, but significantly oversupplied next year. The quarterly breakdown puts the call on OPEC for the current quarter at 28.0 mb/d, however, suggesting the market is currently tight.
Short term tightness is apparent in the downward slopping nature of the Brent forward curve, but is less clear in refined products like jet fuel, gasoil and diesel where the short end of the curve is flat or modestly upward slopping, indicating a well-supplied market. Weakness can also be seen in the falling premium of refined products over crude oil prices which have contracted back to pre-Ukraine war levels.
Crude oil is receiving support from investors, however. Data reported by exchanges indicates that speculative long positions in US WTI, in particular, have increased of late and net longs on the US contracts are now at the highest levels they have been all year. This could well be correlated with a general risk-on mode in asset markets which has seen the S&P 500 make fresh record highs. Investors in Brent are less bullish, than on WTI, but long have increased recently and shorts reduced.
For now, the relative tightness in the market due to strong summer demand combined with messaging from OPEC+ suggesting that they will increase output if they can, but won't if the market can't take it, is a recipe for low volatility. Brent has been rangebound as a consequence and volatility implied by the options market has fallen to its lowest level for many years. Once the summer demand peak is over, the asymmetry in OPEC+’s ability to manage the market could be exposed. It is much harder for OPEC+ to cut further to deal with an oversupply than it is to increase output if demand surprises on the upside. OPEC’s own supply demand estimates are far more bullish than the IEA, however and if they prove to be correct, OPEC+ will be in a good position. Such a rosy view does seem hard to reconcile with the less than optimistic growth outlook for China – a vital market for most OPEC+ members. China’s Third Plenum, the latest of a 5-yearly conclave that can lead to significant strategic shifts, was held recently, but did not have much to inspire markets and the quarterly growth numbers published this week came in lower than expected at 4.7%.
September could be a critical month for the core members of OPEC+, as they will have to decide whether to go ahead with unwinding voluntary cuts as they pencilled in for October.
Brent is currently treading water around 85 \$/b and recent downside has been limited to the 100 and 200-day moving averages around 83.50 \$/b. A break below that could open up further downside with potential to break 80 \$/b and test the June lows around 77 \$/b. On the upside, there is trend-line resistance around 87 \$/b and the high of this month just under 88 \$/b.
