Completed the barrel: oil prices withstood the OPEC+ meeting
Contrary to expectations, OPEC+ countries have agreed to further increase oil production since October. Saudi Arabia, which has recently been trying to regain market share, could play a decisive role. Interestingly, the decisions to increase production did not lead to a significant drop in oil prices. Why the market reacts calmly and whether the world is threatened by an oversupply of oil is in the Izvestia article.
Saudi Arabia took the lead
During an online meeting, eight OPEC+ countries agreed to increase production by 137 thousand barrels per day from October. This is significantly lower than the monthly increase in September and August (then it was about 555 thousand barrels per day), as well as in July and June (411 thousand barrels per day each).
However, the result was unexpected: most analysts expected that production would not change following the meeting. This decision was justified by the general good state of the global economy, which is ready to accept "extra" volumes of oil.
Saudi Arabia and Russia will provide the largest increase in production (42 thousand barrels per day each). Iraq, Kuwait, the United Arab Emirates, Kazakhstan, Oman and Algeria will increase production. The remaining members of the group will not officially increase production, mainly due to a lack of spare capacity.
For the Saudi monarchy, the strategy of gaining a place in the market has been working for quite some time. As for Russia, for objective and subjective reasons, it has significantly reduced production, which needs to be replenished.
In total, from April to Sunday's agreements, OPEC+ increased production by 2.2 million barrels per day (approximately 2.2% of global demand).
The elimination of the second package of restrictions of 1.65 million barrels has now begun. It will be somewhat more difficult to do this. In the summer, the increase in production was natural, since the demand for motor fuel easily absorbed all additional volumes. OPEC+ said it reserves the option to accelerate, suspend or reverse production increases at future meetings. The next meeting of the eight countries is scheduled for October 5.
The increase in oil production by the group's countries occurs against the background of Saudi Arabia's desire to "punish" other participants: Kazakhstan for exceeding quotas, and the United Arab Emirates for increasing new capacities.
In addition, US President Donald Trump pressed the group to increase production in order to fulfill his election promise to lower domestic gasoline prices.
The market has calculated everything
The increase in production has led to a drop in oil prices of about 15% since the beginning of the year. This lowered the profits of oil companies to the lowest level since the pandemic and triggered the reduction of tens of thousands of jobs. Nevertheless, oil prices have not collapsed, recently being in the range of 65-70 dollars per barrel. At the same time, the increase in OPEC+ production did not reach the promised volumes, since most of the participants produce slightly below their capacities.
At the moment, only Saudi Arabia and the UAE are able to add significant amounts of oil to the market. Before Sunday's deal, OPEC+ had two levels of cuts: by 1.65 million barrels per day for eight participants and another, by 2 million barrels per day for the entire group, effective until the end of 2026.
Why was the effect of increased production on the market quite moderate? If we talk about the last meeting, the markets took into account the likely increase in advance, says Finam analyst Nikolay Dudchenko.
— For these reasons, we saw a drawdown in prices even before the meeting, and subsequently prices returned to the growth trajectory. The rule "buy on hearsay — sell on fact" has worked here, the expert explains.
In addition, OPEC believes that the prospects for the global economy look stable.
— It also seems to us that the situation this year may turn out to be slightly better than some forecasts. We believe that the market can be balanced by now. In addition, it should be remembered that individual OPEC + countries also compensate for the oversupply of oil production, respectively, the actual volume of additional barrels on the market may be lower than stated in the updated plans of the cartel, the expert explained.
Orlan Ondar, a consultant at Implementation, noted that prices remain relatively high due to significant seasonal demand, including active oil purchases from Asia and especially China. Even despite the gradual increase in OPEC+ production, there is currently no surplus in the market.
However, analysts disagreed about the likelihood of such a surplus in the coming months (which threatens to put serious pressure on prices).
— We believe that there is no such threat. The situation with growing stocks also looks uncritical. In addition, OPEC+ can always return to production cuts if necessary. The cartel has repeatedly emphasized this in its messages," said Nikolai Dudchenko.
According to Orlan Ondar, the threat of a surplus is present.
— Oil consumption is declining after the summer peak, and part of the refinery is undergoing scheduled repairs, which reduces demand for raw materials. If all the announced OPEC+ volumes enter the market at the same time, and economic activity in Asia slows down, there may be an oversupply and increased pressure on prices," he explained.
Marcel Salikhov, President of the Institute of Energy and Finance, is convinced that there will be no significant oil surplus without a change in the policy of the OPEC countries.
— OPEC+ is not interested in a sharp decline in oil prices. The current policy is based on a gradual, controlled increase in production, taking into account the fundamentals of supply and demand, as well as with an eye on the global economy and oil reserves," the expert recalled.
According to him, OPEC+ is not interested in constantly maintaining high prices, which enable producers outside OPEC+ (the United States, Brazil, Guyana, etc.) to invest in new projects without fear of falling oil prices.
"These countries have great opportunities to rapidly expand production in the event of persistently high prices, which ultimately reduces OPEC+'s market share,— Marcel Salikhov concluded.
American Load balancer
However, if we look at the medium term, there is now a balancing act on the market — American shale oil, the cost of production of which is in the region of $ 50-60 per barrel.
— A sharp drop in prices may bring down production in America, which will lead to a stabilization of the situation. It can be stated that oil prices are already quite low for American companies. So, according to the latest report by Baker Hughes, the number of oil rigs in the United States today is about 415 units, having decreased from 480 units last year," stated Nikolai Dudchenko.
While production is growing as a result of increased productivity, however, in the event of a further drop in prices, it is likely that the situation may change, stated Dudchenko.
According to Orlan Ondar, there are always closing suppliers on the market, including companies producing shale oil. If prices fall below cost-effective levels, part of shale oil production is reduced, which limits supply. When prices recover, production returns. Shale smooths out fluctuations and gives the market additional time to rebalance, but it does not completely eliminate the risk of a surplus.
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