October presents Opec+ with a quandary

Ronnie Chua/Alamy via Reuters Connect

To restore, or not to restore? That is the question.

Whether it is better for Opec+, the oil alliance led by Saudi Arabia and Russia, to stick to their plan to bring barrels back onto the market from October, or bow to global economic uncertainty by postponing the restoration?

Two points have to be borne in mind before delving into the intricacies of Opec+ thinking on this current issue.

One is that the amount under discussion is small. The Opec+ plan agreed in early June aims to eventually put back 2.2 million barrels per day onto global crude markets. But the first tranche scheduled for next month only amounts to 180,000 barrels – a rounding adjustment in the global market of roughly 100 million barrels a day.

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The second is that Opec+ is well within its rights if it decides not to proceed with the restoration. It made clear in June that it could “pause or reverse” the planned increase, subject to market conditions.

Nonetheless the October increase was presented back in June as the first step in a carefully calculated schedule to finally unwind cuts that have their origins in the successful strategy to deal with the pandemic glut of crude.

For the sake of credibility, Opec+ will probably want to stick with the plan, at least in its initial phase.

But there are big macroeconomic factors at play that mean such a move is by no means clear-cut.

The premise was that by autumn the global economy would be back firing on all cylinders

When the restoration schedule was unveiled in June, the premise was that by autumn the global economy, of which the US and China are the most important elements, would be back firing on all cylinders, and demand for oil would be booming again.

With a Federal Reserve interest rate cut looking all the more likely, the US will probably live up to the expectations of continued economic growth, which is good for overall oil demand.

On the other hand, the picture in China is still uncertain. There have been few recent releases of economic data, but nothing has occurred to quell long-held fears over the pace of economic growth or the country’s financial resilience.

The experts are forecasting a slowdown in Chinese oil refining this year, after decades of growth, which has big implications for crude demand.

Most energy analysts have been scaling back estimates of aggregate oil demand growth this year, to the point where the consensus is around an extra one million barrels a day. Opec’s forecasts, at just over two million, have been slightly trimmed, but remain an outlier.

The notion of injecting fresh supply amid these mixed market signals might be seen as inherently risky, and the crude price has reflected this in recent weeks, falling below the $80 mark. (Brent crude stood at $73 on September 2.)

A straw of comfort for Opec+ came in the form of the latest troubles in the Libyan oil industry, where most production in the country ceased amid another round of the seemingly endless internal squabbles.

If Libya’s one million or so barrels were to remain off the market for any length of time, that could be a justification for increased Opec+ output from October. But responding to short-term crises in that volatile country could hardly be called a strategy.

The other big change from the first half of 2024 is the emergence within Opec+ of a new power nexus, the “Group of Eight” countries that were instrumental in pushing through the June restoration schedule.

Saudi Arabia, Russia, the UAE, Iraq, Kuwait, Kazakhstan, Oman and Algeria all signed up for the plan to bring back 2.2 million barrels over the next year. But their interests, while fairly well aligned, are not identical.

Some of them, such as the UAE, have made no bones of the fact that they want to utilise all the spare capacity they have, while Russia wants to maximise oil revenues to finance its war in Ukraine.

Saudi Arabia seems to be the voice of reason in this group, looking for global market stability, despite rising fiscal pressures at home. How permanent a feature the Group of Eight is within Opec+ remains to be seen.

Opec+ does not concern itself with oil prices (of course), instead concentrating on supply and demand balance. But the truth is that the current price level is not quite high enough for most Opec+ members.

Some analysts are now talking of $80 being a ceiling for the rest of the year, rather than a floor, as it has been hitherto.

It is a quandary for Opec+ policymakers, for sure.

A neat compromise could be for Opec+ to add back the October tranche of 180,000, while reiterating that subsequent monthly restorations are, once again, subject to “pause or reversal”, depending on market conditions.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE