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Barrelling Ahead: OPEC’s Plan and Oil’s Next 18 Months
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Barrelling Ahead: OPEC’s Plan and Oil’s Next 18 Months

OPEC+’s conditional plan to ease production cuts theoretically returns a huge volume of crude next year but the market will not likely be positioned to painlessly absorb it all

Rory Johnston's avatar
Rory Johnston
Jul 11, 2024
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Commodity Context
Commodity Context
Barrelling Ahead: OPEC’s Plan and Oil’s Next 18 Months
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Become a paid subscriber today to view this full analysis of global oil balances and OPEC+’s production cut easing space over teh coming year and a half—join me in my hunt for ever-deeper oil market context.

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  • The crude market eagerly awaits firmer guidance from OPEC+ as to whether or not the producer group will follow through on its plan to begin gradually easing its production cuts in October.

  • The announced return of 2.2 MMbpd over the course of a year is a lot of oil; OPEC+ policymakers will need to walk a fine line if they want to avoid tanking prices in the process.

  • Global demand will determine the ease with which OPEC+ is able to return those barrels to market with those to-be returned OPEC+ barrels in a zero-sum competition with potential supply additions from non-OPEC+ producers like the US, Canada, Brazil, and Guyana.

  • It’s going to be a few more months before we get signs as to which way OPEC+ is leaning (to ease or not to ease); but, the most likely scenarios seem to be (1) a fight for market share with negative price implications or (2) only a partial easing in an effort to provide some relief an increasingly restless membership while continuing to support prices.

How will global oil balances evolve over the next 18 months? The crude market eagerly awaits firmer guidance from OPEC+ as to whether or not the producer group will follow through on its announced plan to begin, in October, gradually easing its production cuts given concerns that the current market might not easily absorb the return of those withheld volumes.

Markets are reasonably tight today and conditions are only expected to tighten further into the third quarter. All three major oil forecasting agencies—the IEA, EIA, and OPEC—estimate that the oil market was modestly undersupplied in the second quarter of 2024, with lower inventory positions and steeper crude futures curve backwardation both further supporting the existence of currently-tight conditions. With OPEC+’s firm extension of production cuts through the end of September, all major forecasts see the market tightening further and prices supported through the remainder of the summer. Yet, it’s critical to remember that the strength of the current crude market is an explicit policy choice by OPEC+. Specifically, the producer group is withholding historically-large volumes to artificially maintain these conditions; but, members are champing at the bit to return those barrels to market. 

OPEC+ must now walk a tightrope to increase production without flipping the market into notable supply surplus—a surplus that would refill inventories, push the market back into contango, and depress prices. It’s impossible, therefore, to have a firm view of 2025 oil market balances without a position on OPEC+’s price sensitivity; policymakers in Vienna and Riyadh are being faced with a choice: higher prices or more production and market share?

So, let’s dig into the numbers to see what exactly OPEC is dealing with and what combination of demand growth and non-OPEC+ supply pullback—say, harsher Iran sanctions—would be required for OPEC+ to be able to increase production as planned without any materially adverse price implications.

Conditional Crude

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