Fear of oil-price collapse lurks behind Opec+ cuts decision

December 6, 2024, 1:49 PM

An oil refinery in Wuhan, China. The sluggishness of the country's economy is a major factor in stagnating oil demand

Oil output rise delayed again
Potential hit to Saudi GDP
Group waiting on Trump

An Opec+ decision to delay raising oil output for another three months and extend the gradual phase-out of production cuts to the end of 2026 could crimp Saudi hopes for a major GDP boost – but shows how fearful oil states are of a price collapse.

Cuts were scheduled to begin unwinding from October 2024 but a slowdown in global demand and rising output elsewhere forced the oil group to postpone the plans on several occasions.

Despite the supply cuts, global oil benchmark Brent crude has mostly stayed in a $70 to $80 per barrel range this year, hitting a 2024 low below $69 in September.

Meanwhile, the Saudi Arabian economy contracted in 2024 by 0.8 percent. The International Monetary Fund has predicted 4.6 percent in 2025 as more oil is sold, raising questions about the growth and funding for massive giga-project spending.

Bill Farren-Price, a senior research fellow at the Oxford Institute for Energy Studies, says anxiety over downward pressure on global prices seemed to trump other concerns.

“The first priority is to avoid crashing the oil price and with all the political and fiscal uncertainty at the moment, oil is potentially vulnerable to a downside reset. So that is what they want to avoid at all costs,” he says.

“Reversing the cuts is planned to be an incremental process ramping over months. So pushing it back another month or so is neither really here nor there in terms of GDP.”

Since 2022, Opec+ members have held back 5.86 million barrels per day (bpd) of output, or about 5.7 percent of global demand, in three tranches with separate agreements.

At Thursday’s virtual meeting, Opec+ ministers agreed to extend the compulsory two million bpd tranche and a voluntary 1.65 million bpd tranche both to the end of 2026 instead of the end of 2025.

A third voluntary tranche of 2.2 million bpd of cuts will be reduced gradually from April instead of January, lasting 18 months until September 2026 instead of only 12.

David Oxley, chief climate and commodities economist at London-based Capital Economics, says the group was putting off taking tough decisions.

“The backdrop of weak global oil demand means it could easily find itself back in a similar position in three months’ time. In our view, the fundamentals for oil prices remain weak, and the risks to prices are skewed to the downside,” Oxley says.

The group will be waiting to see the impact of incoming US president Donald Trump’s new administration and its policies.

Trump could try to ramp up US production but also impose new sanctions on Iran in an effort to reduce its oil in the market.

Planned tariffs on China could also have an impact on its economy, the sluggishness of which has been a major factor in stagnating demand.

Energy analyst Peter Wells says Riyadh remains resistant to raising production to secure market share at lower price levels – an approach it last took in 2020 in a price war with Russia – but large spare production capacity means it can respond to big market shifts.

But prices are destined to fall, he says.

“The reduction in demand from China coupled with European stagnation and burgeoning US oil production – never mind Brazil and Guyana – will all put downward pressure on the oil price in the coming decade.”