OPEC+ likely to extend production cuts in June

LONDON: Saudi Arabia and its allies in OPEC+ are likely to keep oil production unchanged for a further three months when ministers review output allocations on June 1.

The tightening of petroleum supplies and depletion of inventories widely anticipated at the start of the year has failed to materialise so far.

If OPEC+ (Organization of the Petroleum Exporting Countries and allies) officials had hoped to increase production into a tightening market characterised by rising oil prices they are likely to be frustrated.

Crude stocks, futures prices and calendar spreads are all at similar levels to a year ago, making a significant increase in output unlikely.

The group may nonetheless decide it needs to rescind some of last year’s output cuts to pre-empt a further rise in production from the United States, Canada, Brazil and Guyana and avoid conceding more market share.

But current market conditions mean any increase is likely to be symbolic, in the absence of a wholesale shift in strategy to increase volumes and accept lower prices.

Front-month Brent futures have averaged $84 per barrel so far in May putting them exactly in line with the average since the start of the century after adjusting for inflation.

Prices have risen by just $6 per barrel, or 7 percent, compared with a year ago when the group was planning production cuts to boost them.

Brent’s six-month calendar spread has traded in an average backwardation of $3.54 (86th percentile for all months since 2000) so far in May compared with $1.81 (60th percentile) this month in 2023.

the economy added fewer jobs than expected, while the unemployment rate ticked higher and wage growth unexpectedly cooled.

The increased backwardation implies traders see the market somewhat tighter than in 2023 with a greater likelihood inventories will deplete over the rest of 2024.

But the backwardation has been breaking down in recent weeks and has already narrowed from an average of $4.86 (95th percentile) in April.

Despite an increase in tensions across the Middle East, causing a temporary rise in the war risk price premium, there has been no actual impact on oil supplies, and the premium has largely faded.

Diplomatic efforts have contained conflict between Iran and Israel, with no impact on either oil production or tanker exports from the Persian Gulf.

Tanker traffic has been re-routed from the Red Sea and the Gulf of Aden around the Cape of Good Hope to avoid drone and missile attacks from Houthi fighters based in Yemen.

Senior OPEC ministers and officials stress the group’s policy is to be proactive and forward-looking.

That may be true when it comes to reducing production to avert an increase in excess inventories and stabilise prices.