For Oman, the transition to cleaner energy sources is both an imperative and a practical economic path to a more sustainable future.
AGSIW's publications are also available in Arabic. Help AGSIW expand its Arabic-language analysis.Donate
Ministers from the 23-member OPEC+ alliance of oil producers held one of their more contentious meetings in Vienna June 4 angling to support higher oil prices. Despite the group’s willingness to do “whatever is necessary” to balance markets, what emerged after two long days and a late night of tough negotiations was a simple agreement to extend current production quotas until the end of 2024 as well as a grand gesture by Saudi Arabia to slash production for July to “to ice the cake.”
The OPEC+ alliance essentially just moved the goal posts by extending quotas adopted in October 2022 and the voluntary cuts agreed to by a group of eight members in early April from the end of 2023 to the end of 2024 at their formal biannual 35th OPEC and non-OPEC Ministerial Meeting. The OPEC+ group is made up of the 13 members of OPEC and 10 non-OPEC producers.
Saudi Arabia stepped up, once again, to implement another “voluntary” production cut of 1 million barrels per day for July, reducing production to 9 mb/d for the month, though the Saudis left the door open to extend the lower output levels. Saudi Energy Minister Prince Abdulaziz bin Salman said the July cut was a “Saudi lollipop” to sweeten an otherwise bland deal.
Importantly, after years of avoiding sensitive discussions, the group also tackled the difficult task of aligning inflated quotas for some countries with their actual production capacities starting in 2024.
Russia’s chronic flaunting of its production quotas also came under the spotlight. The country had pledged to extend a 500,000 b/d cut at the April meeting until the end of the year but so far has failed to meet its commitments. Reports emerged in late April that Saudi Crown Prince Mohammed bin Salman held talks with Russian President Vladimir Putin to secure a renewed commitment from Moscow for better compliance with quotas.
Weaker Macroeconomic Outlook Weighs Heavily on Oil Markets
The immediate impact of the June 4 meeting on oil markets was muted. While the group achieved some important goals on its agenda, boosting flagging oil process wasn’t one of them. Prices initially edged higher when markets opened June 5 but quickly retreated the following day. Brent crude oil futures prices traded in a higher range when markets opened the morning of June 5 but eased again and were up less than $0.20 per barrel when markets closed on June 7.
Oil prices are now almost $10 lower than they were five weeks ago when Saudi Arabia and seven other OPEC+ members announced a surprise production cut of 1.16 mb/d that initially pushed prices higher. But then, as now, price gains proved fleeting.
And now, as then, oil prices remain under pressure from turmoil in financial markets, slower-than-expected economic growth, stubbornly high inflation, the relentless rise in interest rates by central banks, and, more recently, protracted and difficult negotiations over the debt ceiling in the U.S. Congress.
For oil markets, the persistent economic uncertainty and the corresponding impact on oil demand weighs heavily on the price outlook. The International Monetary Fund warned in its April 11 World Economic Outlook that risks to its gross domestic product forecast “are heavily skewed to the downside, with the chances of a hard landing having risen sharply.” The IMF’s baseline forecast projects GDP growth to fall 0.6 percentage points to 2.8% in 2023 from 2022 before edging up to 3% in 2024. However, with further financial sector stress and a weaker-than-expected Chinese economic rebound following the easing of coronavirus restrictions, global growth could fall to about 2.5% in 2023. Other economic forecasting agencies have even lower growth projections than that of the IMF.
Petro Diplomacy Prevails
The most protracted and contentious discussions in Vienna were focused on making significant adjustments to long-outdated official production quotas to align more closely with actual lower production capacity. These adjustments will take effect in January 2024. Since October 2022, OPEC+ has reduced production quotas by 3.66 mb/d, but the actual reduction in oil exports hitting the market has been less than half of that.
Official OPEC+ quotas for some members have long become irrelevant since many countries in the group produce far below their target levels due to capacity constraints stemming from disruptions from civil unrest, domestic operational issues, or lack of investment. The fuzzy math in calculating new targets stems from the outdated production capacity estimates used in the group’s official quota allocation system.
Tracking compliance with production agreements has become an exercise of creative math, with the official headline number difficult to decipher and often distorting the true impact on markets.
After lengthy negotiations at the June 4 meeting, eight countries accepted lower production quotas for 2024, with only the United Arab Emirates receiving a much overdue increase of 200,000 b/d. On paper, the quota realignment will lead to an overall net decline of around 740,000 b/d in January 2024. The group agreed to hire three independent outside consultants to assess and verify production capacities for new baselines for the eight countries that agreed to lowering quotas. The group includes Nigeria, the Democratic Republic of Congo, and Angola, which combined account for about 75% of the quota reductions. The consultancies will continue to assess and verify new baselines for the remaining countries in the 23-member alliance. Iran, Venezuela, and Libya are currently excluded from agreements due to sanctions or chronic civil unrest disrupting production, but these countries will also be reviewed as part of the realignment. The OPEC Secretariat expects that by the end of June 2024, the review of all OPEC and non-OPEC members will be completed, and the new production capacities will be used for 2025 reference quota levels.
While the worrying macroeconomic climate continues to dominate global oil prices, energy analysts are reassessing the supply and demand balance through the end of the year, which for many was already extremely tight.
Almost all the major forecasting organizations, investment banks, oil traders, among others, were already expecting a significant supply shortfall against the backdrop demand growth accelerating sharply through the end of the year, which will now be compounded by the Saudis’ 1 mb/d cut, extension of cuts until the end of 2024, and improved compliance with production quotas by others, including Russia.
The OPEC Secretariat’s own monthly market forecast, released May 16, projects demand rising by 1.5 mb/d in the second half of 2023 over the first six months of the year. The International Energy Agency forecasts an even sharper increase in demand of 2.1 mb/d over the same period in its May report. The supply shortfall is expected to be filled by a large drawdown in global oil stocks, which almost always corresponds with rising oil prices.
The June 6 U.S. Energy Information Administration Short-Term Oil Outlook factored in the latest OPEC decisions. The report noted that, “Following the OPEC+ announcement on June 4 to extend crude oil production cuts through 2024, we forecast global oil inventories to fall slightly in each of the next five quarters. We expect these draws will put some upward pressure on crude oil prices, notably in late-2023 and early-2024. We forecast the Brent crude oil spot price will average $79 per barrel (b) in the second half of 2023 (2H23) and $84/b in 2024.” Mirroring concerns among oil consuming countries, the IEA warned in April that higher oil prices will lead to increased inflationary pressures and undermine the global economic recovery.
For OPEC+, and especially Saudi Arabia, a steady increase in prices toward $85/bbl or more and higher revenue would be a very welcome development. The kingdom’s ambitious and costly economic transformation requires an oil price of near $81/bbl a barrel or Saudi Arabia will post a budget deficit in 2023, according to the IMF. The Saudi government had penciled in a $16 billion surplus.
OPEC+ ministers will likely meet to review the market outlook on the sidelines of the group’s July 5-6 biannual 8th OPEC International Seminar. The next Joint Ministerial Monitoring Committee, held every two months to review global oil market conditions, is expected to take place in early August then will report its findings to the membership. The formal OPEC+ biannual Ministerial Meeting is scheduled for November 26 in Vienna.
has written on energy issues for over 35 years. She was previously a non-resident fellow at the Arab Gulf States Institute in Washington and is currently a contract editor for the Paris-based International Energy Agency, where she earlier served as a senior oil market analyst.
A recently signed security- and economy-focused pact marks the latest development in the United States’ close, long-standing partnership with Bahrain.
A substantial drawdown on global oil stocks is forecast for the fourth quarter amid record oil demand, accelerating the rise in oil prices to the $100 per barrel threshold.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More