The oil market has been relatively stable despite the geopolitical storm in the Middle East engendered by the war in Gaza and the disruption of maritime traffic in the Red Sea by the Houthis in Yemen. Oil prices have traded either side of $80 per barrel even since a number of OPEC+ plus producers, led by Saudi Arabia, said in early March that they would extend oil production cuts totaling 2.2 million barrels per day until midyear.

Saudi Arabia announced March 3 that it would be extending a voluntary cut of 1 mb/d, first implemented in July 2023, to the end of June. It was joined by Iraq, the United Arab Emirates, Kuwait, Algeria, Oman, Kazakhstan, and Russia. OPEC said, in announcing the decision to roll over the output reductions, that these would be “returned gradually subject to market conditions.” The price of Brent crude oil, the global benchmark, rose slightly in response to the announcement but has since fallen back to trade at just under $84/bbl.

The decision to prolong the supply cuts appears to have been motivated by the strength of production growth from producers outside the OPEC+ alliance, particularly the United States, rather than by weak demand projections.

The March 12 OPEC “Monthly Oil Market Report” projects 2024 oil demand will grow “at a robust” 2.2 mb/d year-on-year then slow to 1.8 mb/d in 2025, both unchanged from the February forecasts. These projections, it noted, are based on the assumption that “the 2024 and 2025 growth trajectories of India, China, as well as the US, could exceed current expectations.”

Oil production in the United States reached a record 20 mb/d in the final quarter of 2023, although both the International Energy Agency and the United States’ Energy Information Administration expect output growth to slow this year and next. The IEA, in its February “Oil Market Report” said it expects U.S. oil production growth of 760,000 b/d in 2024 compared with growth of 1.5 mb/d in 2023. The EIA’s projection is more bearish with growth of just 240,000 b/d projected for 2024. It further expects U.S. output to remain below the 2023 record to 2025.

According to OPEC’s March report, the main contributors to non-OPEC supply growth in 2024 will be Canada, Brazil, and Norway, while the biggest declines will come from Russia and Mexico. The key drivers of growth for non-OPEC supply in 2025 are forecast to be the United States, Brazil, Canada, Russia, Kazakhstan, and Norway, while oil production is expected to decline in Mexico and Angola.

On the demand side, OPEC projects world oil demand will reach 104.5 mb/d in 2024, “supported by strong air travel demand and increased road mobility, including on-road diesel and trucking, as well as healthy industrial, construction and agricultural activities, particularly in non-OECD countries.” But it cautioned that its forecast was subject to uncertainties, including global economic developments.

The war in Gaza and dozens of attacks by the Houthis against vessels in the Red Sea have not resulted in serious disruption to supplies from the Middle East, which explains the sanguine response by the oil trading community. Oil tanker and commercial traffic has largely been diverted away from the Red Sea and the Suez Canal to the longer route around the Cape of Good Hope, adding to shipping and insurance costs.

Supply from Libya, which is not party to OPEC+ quotas, has recovered after protests shut down some production, while Iraq has been overshooting its target despite the continued shutdown of the northern export pipeline through Turkey since late March 2023. The closure of the pipeline has kept some 500,000 b/d off the market, most of it oil produced in the Kurdistan region of Iraq. According to a survey by price reporting agency S&P Global Platts, OPEC+ collectively produced 175,000 b/d in excess of the group’s February quotas with Iraq and Kazakhstan the main culprits. Iraq produced 4.27 mb/d against a quota of 4 mb/d, while Kazakhstan was 92,000 b/d above quota.

OPEC made reference to “planned and unplanned oil supply outages along with geopolitical developments in some producing regions” that it said had “raised concerns about global oil supply outlooks.”

Beyond price considerations, OPEC is banking on the supply cuts reducing the level of inventories held in consuming countries. Ed Crooks, vice-chair, Americas, at consultancy Wood Mackenzie, wrote that the extension of the cuts would accelerate global stock drawdowns: “Wood Mackenzie had forecast that without the extension, the implied stock draw would be about 600,000 b/d in the second quarter. With the extension, we expect the draw to be about 1 million b/d greater than that.”

By withholding supply now, the OPEC+ countries are playing a long game in anticipation of a slowdown in non-OPEC production growth. Crooks noted that in Wood Mackenzie’s November 2023 Investment Horizon Outlook for oil, it had projected that “growth in non-OPEC production would slow by the end of the 2020s, and turn into outright declines in the 2030s, as the core US tight oil inventory starts to deplete.” He added that, “As a result, OPEC’s share of the oil market is set to grow.”

OPEC expects demand for its crude in 2024 to come in at around 28.5 mb/d, higher by 1.1 mb/d over the estimated level for 2023. Demand for OPEC crude in 2025 is set to rise to around 28.8 mb/d, an increase of 300,000 b/d over the 2024 forecast.

The 12 OPEC members produced more than 26.5 mb/d of crude oil in February, according to secondary source estimates referenced in OPEC’s March report. OPEC relies on independent sources to assess production levels of its individual members and their compliance with quotas. Price reporting agencies S&P Global and Argus, specialist energy publication Energy Intelligence, consultancies Rystad Energy and Wood Mackenzie, as well as the EIA are the secondary sources.

In April 2022, OPEC dropped the IEA as a secondary source in a reflection of souring relations between the two organizations that has seen them diverge widely in monthly and longer-term demand forecasts. This followed publication of the IEA’s “Net Zero by 2050” report in 2021 in which the agency stated that there would be no need for new investment in oil and gas if carbon neutrality is to be achieved by midcentury.

The IEA has been increasingly bearish in its demand outlook for 2024. In its February report, it forecast a sharp deceleration in oil demand growth, which it forecast at just 1.22 mb/d, down from 2.28 mb/d in 2023.

The February report stated that 2024 demand growth would come mainly from China, with additional support from India and Brazil. Among them, the three countries are expected to account for 78% of 2024’s global demand growth. However, the report added that “Chinese oil demand growth is losing momentum, in line with a wider cooling in the country’s economy,” citing weaker-than-expected demand in November and December 2023. But the IEA also had to acknowledge that it had underestimated 2023 demand growth, largely due to gasoline demand outpacing its initial expectations.

This was picked up by Saudi Energy Minister Prince Abdulaziz bin Salman, who said that such revisions were damaging. Speaking at the International Petroleum Technology Conference in Dhahran February 12, Prince Abdulaziz didn’t mention the IEA by name, but the inference was clear. “Look at how much others keep backpedaling,” he told the conference. “They issue numbers in the early part of the year which are low, and pessimistic, and then later on come back and say ‘we got it wrong.’” For the minister, a key frustration is that, by the time these revisions occur, “the market would have been impacted by this negativity. When they do the backpedaling, it will be ex post facto, and they get away with it.”

OPEC+ is due to hold its next full ministerial meeting in Vienna June 1, when the alliance will have to consider whether to keep a tight rein on production in the second half of the year or restore some production if its bullish demand forecast holds up. The group is also due to consider an independent audit of the production capacity of each of the 22 members and set new quotas for 2025 accordingly. That could prove problematic for some countries that have presented inflated estimates of their capacity.

A partial rollout of the scheme to a number of sub-Saharan members was implemented in November 2023 and led to Angola quitting the group, as it disagreed with the scale of the downgrade to its production allocation.

The remaining OPEC+ members have since publicly reaffirmed their commitment to the alliance, but switching to the new approach could open up new disagreements in June.

Although the next meeting will be crucial to the preservation of cohesion within the diverse alliance, OPEC+ has taken a more proactive approach to maintain stability and prevent excessive volatility. It hopes to achieve this by setting out planned production levels to the end of 2024 and 2025 to ensure what Prince Abdulaziz has said was the need to ensure market stability and security.

OPEC will be heartened by an independent report released by the U.S. Federal Reserve Board that looked at how communication by OPEC and speeches by ministers impact the oil market. The authors of the report said they considered 343 press releases made by OPEC between March 2002 and March 2021. It concluded that, “OPEC communication that reassures the market on production capacity and supply contributes to oil market stabilization.”