Listen: Decoding the OPEC+ meeting: crude output increases in 2024

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Herman Wang: Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights where we'll be talking today about the OPEC+ meeting on June 2nd where ministers announced a deal on production cuts. I'm Herman Wang.

We've had the OPEC+ meeting on June 2nd where ministers, some of them gathering in Riyadh and the rest dialing in virtually, announced the deal. It's a bit of a complex one involving extensions of varying lengths for different rounds of cuts and some gradual bringing back of supply to the market, and a big win for the UAE. Here to break it down for all of us are from the Commodity Insights News Desk, Rosemary Griffin, our Senior OPEC+ correspondent, and Charlie Mitchell, our Chief Africa correspondent who are monitoring all the proceedings. And also Payam Hashempour, lead analyst for Commodity Insights for crude and refined markets. Let's start with you Rose, the OPEC+ deal, it's got a lot of layers to it, a lot of different rounds of cuts. Can you explain to us in plain English, what exactly was decided and what can the market expect?

Rosemary Griffin: I'll do my best. So the producers that are implementing 2.2 million barrels a day of voluntary cuts, they decided that they will extend them through September. So ahead of the meeting, some people had thought there might be a rollover to the end of the year, but they have not decided to do that yet. They then plan to begin rolling those cuts back by around 180,000 barrels a day each month through to the end of 2024. And then between January and September 2025, they'll bring back around 213,000 barrels a day.

And that group includes some of the biggest producers in OPEC+, including Saudi Arabia, Russia, Iraq, the UAE, Kazakhstan. Also, Russia, Kazakhstan and Iraq have agreed to submit compensation plans for overproduction in early 2024 by the end of June. This has been kind of a bone of contention over the last few months. All three have been overproducing. Russia just moved into overproduction in April, but there's going to be a lot of focus on those compensation plans and whether these countries are able to meet them. In addition to all of that, the other existing quotas have been extended until the end of 2025. That's not something that we expected before the meeting. And finally, a review of each member's production capacity, that's for the full OPEC+ group, has been pushed back from June this year until late 2025.

Herman Wang: Right. So a lot of moving parts there. Basically what I'm hearing is the status quo until September. Then some of those voluntary cuts start getting rolled back, gradual reintroduction of those voluntary, the supply back into the market. Now we've seen the market reaction since the decision was announced. Data Brent has gone down in the last couple of days since the decision was announced on June 2nd. Maybe seems like the demand indicators out there are looking a little bit wobbly. Payam, let's bring you into this. What's the view from the analyst side of S&P Global Commodity Insights on how the market should be viewing this OPEC+ decision? What's the outlook for supply-demand balances and prices?

Payam Hashempour: Yeah, thanks. Absolutely. On May 31st, the last trading day before the actual OPEC+ meeting, which took place on June 2nd, the Data Brent was just above $80 a barrel. Now slightly fast-forward to June 4th and prices settled for Data Brent at just over 76. So we're talking slightly more than $4 a barrel decline in two trading days. And absolutely there has been some jittery demand signals that has played a part, but really the main contributing factor is the OPEC+ announcement and the voluntary cuts, namely by the eight countries, few of which Rosemary mentioned earlier.

And also obviously UAE, the 300,000 barrels that they've increased, that they've negotiated starting from January 2025, it's a big signal in terms of how OPEC+ it's going after that unity. Russia and Saudi Arabia and other members, despite a lot of over production by some producers, now we've seen an announcement that 300,000 barrels a day will be added to only one country's quota from January, is a signal that perhaps the market wasn't expecting yet. As an analyst or within our balances, we expected these production cuts that we have in place at the moment in the very short term to be prolonged, which we have seen. So we don't expect any change until at least October.

But what we have to factor in is OPEC can make changes very quickly. So if the market conditions are incorrect, if we certainly see prices very low or very high, we could certainly see a reverse or even further cuts, a reversal of cuts or even further additions to these cuts. So we have to wait and see. And if we were to see a scenario where the group actually went ahead and started on winding those 2.2 million barrels, their voluntary cuts, then we could certainly see pressure on prices. And prices could certainly go below 70, $60 a barrel in 2025, but we have to wait and see.

Herman Wang: Right. And market share competition is just something that gets discussed a lot, both within OPEC+ and from the outside. Now, Payam, if you're a buyer of Middle East crudes, how are you looking at these OPEC+ cuts as you plan your crude supplies for the coming months? How does the deal affect your outlook on the market?

Payam Hashempour: Look, Asia is the biggest market for Middle East producers, and a lot of Asian refiners will seek market stability. So in the very short term, the next quarter, the fact that the output will remain similar or the same is certainly good news for those refiners. But we have to, if we look back slightly Asian refiners haven't really faced a significant from these prolonged OPEC+ cuts nor the geopolitical tensions in the Middle East. And that's really largely owing to China and India taking large volumes of sanctioned Russian and Iranian oil, which is in return has left some of those excess barrels in Middle East and sour crudes for other key Asian buyers. So we haven't really seen a huge impact. Now, one thing else I need to touch on quickly is the opening of Trans Mountain Pipeline Expansion. So the TMX project that's taking crude from Canada to the US Gulf, we expect to start seeing flow of those cargoes coming to the Asian market in the coming months.

And in theory, the TMX will reduce the voyages. They cut by almost half from US Gulf Coast to Asia refineries especially. So with lower transportation costs, we could see those barrels also competing in the Asia market. So going back to your question, we don't expect to see a huge impact, but if the production costs were to be unwinded starting October, then we could certainly see some impact on prices of those heavier and more sour barrels, and that could perhaps benefit the refiners in Asia and anywhere else in the world. But the trade flow globally has been very resilient since the Russia-Ukraine invasion, and also in the Middle East unrests, the Hamas and Israel War, Iran and Israel conflict. So we could certainly see maybe some support for those heavier barrels if these cuts were to be reduced.

Herman Wang: Right. And we'll talk a little bit more about geopolitics and also about non-OPEC supply a little bit later on the podcast. But for now, let's bring Charlie into this. Charlie, one of the more notable things about this meeting was the decision to kick those negotiations on the baseline revisions into 2025 for the 2026 quotas. Those were looking really sticky for OPEC+. They were meant to discuss these at the end of June. That's been kicked down the road now. Charlie, what are these baselines, tell us what they are and why are they so controversial?

Charlie Mitchell: Yeah, thanks, Herman. So essentially the OPEC Secretariat has enlisted secondary sources, including actually analysts from S&P Global to come up with production capacity estimates for its members. It's actually quite a collaborative process. They work with the countries themselves, so they have a lot of dialogue around what fields might be coming online in the future and the things and they try and work out how much countries are capable of producing. And these are the baselines, which are the figures essentially from which cuts and quotas are then made. And of course, if they're accurate, it gives OPEC much more control in terms of making its cuts more effective, because the market believes them more. But they're controversial because all of the members of OPEC+ are essentially trying to balance the volume and price, i.e. what is the point of being able to sell at a very high price if you're not able to produce as much as you would like to?

So countries tend to try and push for higher baselines and they might resist numbers which they consider to be too low. And this really came to a head last year when there was a baseline evaluation process carried out for OPEC's African members who are the kind of serial under producers of the group. And they tend to be a lot more focused on volume than price and also much more reliant on IOCs in terms of doing the drilling. Angola in particular took umbrage at the process and felt that the baseline that it ended up with was far too low. And it said that that would prevent it essentially from being able to secure vital investment in its upstream sector, which is an enormous part of its economy. The baseline that it got after the secondary sources carried out their review saw its quota cut from 1.46 million barrels a day to 1.11 million barrels a day. And after a sort of long row about this, it actually quit OPEC in January after 19 years.

If that process sounds like it was fraught, you have to remember that the African members really are among the least difficult members of OPEC. Iraq, the UAE, Russia, these are much more powerful, sort of challenging actors within OPEC+. And a similar review of their capacity estimates you can imagine being even more fraught, particularly given things like Russia's need to produce to sustain its war in Ukraine or Iraq's lack of control, I suppose over the oil production in Kurdistan. That could obviously be a challenge to OPEC unity, at least publicly given the market dynamics that we're going to talk about. So quite cleverly OPEC has taken a decision to punt those decisions around baselines to November 2025, as you say, which avoids these tense discussions and potential disagreements in the medium term.

Herman Wang: Right. And, Charlie, you've written a lot of stories about the dynamics of clout within OPEC+, especially as it relates to that African contingent. And those stories are on Platts Connect, the ultimate resource for those interested in the crude markets we've been discussing. With a subscription, you'll have daily access to prices, news, analysis, market updates, and more, including all of our coverage of the OPEC+ meeting that we've been talking about. So be sure to check the link that we've included in the show notes.

Now, back to you, Rose. So we talked about this a little bit. Payam's brought this up. The big winner in all of this seems to be the UAE, which has long been agitating for a higher quota, and it got one, but it's got to wait until 2025 to start phasing that in. What's happening in the UAE? How did they manage to get this quota bump and what's it mean for OPEC?

Rosemary Griffin: I think it's an acknowledgement of the fact that they've really boosted their production capacity over the last few years. They have been pushing for an increase. I think that they feel like they've been doing more than some other producers in terms of trying to shore up the market. And domestically this growing crude production capacity, it's a key part of their bid to become self-sufficient for gas by 2030. So most of the gas produced in the UAE is associated gas. So quotas really restrain its ability to make progress on that target.

As it stands, they have been producing above their quotas. So they produced 2.95 million barrels a day in April, according to the Platts OPEC+ survey. And this was above its quota of 2.91 million barrels a day. If you look at the situation, it has estimated spare capacity of over 1.3 million barrels a day currently. So a big win for them, as others have said, this is a plan for 2025. So a lot could change between now and then. But the fact that they've managed to secure this and get approval from the rest of the group is a very positive sign for them, and it's a positive sign for OPEC+'s ability to continue to function and maintain some forward unity.

Herman Wang: Right. So that speaks to kind of the intra OPEC+ competition. But, Payam, let's go back to this idea of market share battles with the non OPEC+ producers. There's a lot of rising production from the likes of the U.S., Canada, Brazil, Guyana. What are you guys seeing from the analytics side in terms of non OPEC+ supply going forward and how's that going to affect OPEC+?

Payam Hashempour: So non OPEC+ production has indeed been a challenge since the pandemic for OPEC+ and kind of keeping the prices balanced. We've seen how total liquids production from non OPEC+ has exceeded total global demand growth, and we expect that to continue in '24 and '25. Now, a lot of that production is coming from North America. The US is a straightforward answer. We expect production for crude alone to reach 14 million barrels a day in 2025. That's clearly a sign of challenge for OPEC and OPEC+ producers. On the other hand, we have Canada, the second-largest source of production growth outside of OPEC+, and especially we touched on TMX Pipeline and how the expansion of that project is going to help that bottlenecks in Canada to add to the global crude balances essentially. So they're two of the main sources.

On the other hand, we have Guyana not producing a drop of oil a few years back and now producing around 650,000 barrels a day. And we expect production from there to also to grow gradually towards the end of 2025 and other source. And then we have even smaller producers such as Niger, who very recently became an oil producer and an oil exporter, and we expect them to produce just over 100,000 barrels a day in the near term. So yeah, certainly going forward, the challenge will remain and perhaps that's the sign that OPEC+ is trying to manage the market as well as it can, but at the same time trying to keep the unity within the organization and the wider OPEC+ members at the same time. So I think the challenge will be difficult, but we'll have to wait and see if everything plans out the way they are thinking at the moment.

Herman Wang: Yeah, thanks, Payam. And just on that Niger story, just a quick shout out to Charlie who had the scoop on that, the first cargo loading from Niger through that pipeline through Benin. So you heard it first on Commodity Insights. Now, Charlie, this meeting was notable that it was supposed to be in Vienna, then it got switched to online. Then we found out a couple days before the meeting that several members were going to be meeting in person in Riyadh. There was eight countries there, the ones involved in those voluntary cuts. Again, those are Saudi Arabia, Russia, the UAE, Iraq, Kuwait, Algeria, Oman, and Kazakhstan. Now nobody from Sub-Saharan Africa was invited though. And you've mentioned that Angola already quit OPEC last year, because of these baseline discussions and the dynamics. So is this a new dynamic within OPEC+ that's going to marginalize African members and potential members?

Charlie Mitchell: Well, you're right, Herman to mention the last minute changes, and this is actually the second time in a row that the OPEC+ meeting has been held online. The same thing happened in November last year around the time that Angola was getting really angry about its baseline revisions. But having some ministers meeting in Riyadh and dialing into a call and the rest dialing in from their respective countries is highly unusual. And you, like many OPEC reporters will remember the kind of circus that would descend on Vienna around OPEC meetings. And this, I suppose, marks a real, if this is a new normal of doing meetings virtually, it's a really big change in the history of the organization. For us as journalists, it kind of makes it harder to cover OPEC and we feel it gives less information to the market, because we're unable to speak to ministers, approach them in their hotel lobbies and things.

I suppose OPEC might feel that it helps them keep a lid on discussions before they're ready to announce a deal as they did on June the second. But as you say, having this small group of producers that are making voluntary cuts attending in Riyadh, kind of sends a message that if you're not willing or able to cut, maybe you're not in the kind of inner circle. And this comes after African producers have really seen their influence wane. But also I'll add that Iran and Libya, Iran is subject to sanctions and Libya has had a sort of ongoing civil war and conflict, they're also not subject to quotas and they weren't invited either. The African producers have mainly suffered because of their underproduction, but also the formation of OPEC+ with the Russia-led allies in 2016 and the death of Mohammed Barkindo in 2022, it was a real kind of cheerleader for African producers and actually oversaw an expansion of the African membership.

His death as well has led to their influence kind of being at a really low ebb. An African delegate told me when I asked if they felt excluded, that the ministers are not children, and of course that's the case. But certainly as I say, their influence looks really weak at the moment. And they also have different priorities I should add. I mean, the Saudis we understand are looking for a high oil price, because to fund their vision 2030, very expensive economic transformation agenda. Whereas African producers tend to focus much more on volume, as I said earlier, and actually import a lot of their refined products, because they lack refining capacity. And therefore, high oil prices mean high refined product prices for imports. And that doesn't help them an awful lot either. So they have kind of different priorities.

Having said all of that, we know that OPEC is looking to expand its membership to increase its market share, because of surging non-OPEC supplies we've discussed. And it seems like African producers, emerging African producers are seen as kind of fertile ground for that expansion. We know it's being driven by Haitham al-Ghais, who's the Secretary General of OPEC and previous OPEC president who was Antonio Oburu Ondo, who's the Equatorial Guinea oil minister. And as we've reported, informal discussions have taken place with Namibia, Ghana and Senegal about joining. And Namibia is expected to produce almost 400,000 barrels a day with just current discoveries. And of course there may be more, because it's such an exciting exploration destination in the 2030s according to S&P Global. So if African producers could see their ranks grow by adding new African members and they could steer production upwards, I suppose they could start to see themselves clawing back some of that vital influence within the group.

Herman Wang: Right. I think we'll line with one more question for Rose. Charlie touched on it a little bit there, but this pattern of OPEC+ switching meetings from in-person to online at the last minute holding side gatherings, and you were in Riyadh in April at the World Economic Forum where there was a bunch of OPEC+ ministers that had an impromptu huddle. From an OPEC correspondent perspective, how does all this chaotic scheduling impact how you cover OPEC+ and how's it different between covering an in-person meeting in Vienna compared to an online one?

Rosemary Griffin: We've seen some pretty radical changes talking about Riyadh. There was very much a sense that ministers did not want to talk about oil. It wasn't an oil-focused event, but it was really quite remarkable that you had some really key OPEC ministers all gathering and they didn't want to talk about oil at all. And if you contrast this to particularly pre-pandemic, the kind of atmosphere we used to see at OPEC meetings and OPEC+ meetings, we'd all go to Vienna. There'd be a massive press scrum at the beginning of the meeting. So we'd be allowed in to the hall where all the ministers were preparing to meet and we could run to whichever minister we were focused on and we could ask them questions.

And it really was just such a great chance to hear how they were seeing the market, what was going on domestically. I remember those meetings we used to write loads about the domestic situation and now we're not getting that chance to have face time. We also spend a lot of time in hotel lobbies waiting for delegates, and that's just so important for making sources, reconnecting with sources. People were coming from all over the world, so this was often your only face time with some people who were very, very useful sources of information. So yeah, I miss the Vienna meetings and hopefully we'll be back there in person soon.

Herman Wang: Yeah, there's a lot to like about being in Vienna and OPEC+ reporting is always a whirlwind, whether in person or online, so many moving parts, so many implications. We'll have to end it there, but I think we just about covered it all. Thanks so much to Rose, Payam, and Charlie for joining me in this conversation. And of course, thank you the listeners for tuning in. We touched a little bit on energy security, so I did want to give a plug for our Platts Energy Security Sentinel, a free interactive editorial project you can find on our website analyzing the factors that have helped insulate markets from the risk of supply disruptions. Check it out by visiting the link in our show notes and see how you can stay ahead of the changing relationship between geopolitical risk and the price of oil. All right, that's a wrap. Thanks for listening. I am Herman Wang and this Platts Oil Markets podcast episode was produced by Felix Fernandez in London.