OPEC+ Policy, US Oil Production, And My Thoughts On The Oil Market

OPEC+ Policy

Just 3-months ago, I published a WCTW piece titled, "The Market Is Forcing OPEC+ To Act." In it, I wrote:

Global oil inventories are currently drawing, but they are not drawing anywhere near the implied deficit the models are showing. As a result, when OPEC convenes for its monthly meeting, it will realize that its demand estimates are far too rosy. This will, in turn, force them to have a discussion centered around whether or not to extend the production cut into year-end.

But there's an interesting dilemma that arises from this. If OPEC+ extends the production cut into year-end, it might as well extend into the end of Q1 as well. Seasonally speaking, global oil demand is at the lowest level in Q1, so by leaving Q1 unchecked, the market will overlook the production cut extension and view it as another bearish event (given the uncertainty on Q1 2025).

One of the reasons why oil prices have failed to rally so far (to the structurally higher level) is because refining margins are weak, but also the fact that people are worried about Q1 2025 balances.

If OPEC+ signals to the market that the production cut will last into Q1 2025, speculators will feel more confident and buy oil. This, in turn, coupled with any geopolitical event in the next few months will send oil prices higher.

Fast forwarding to today, news reports are indicating that OPEC+ will extend the production cut to the end of Q1 2025. But the events did not unfold in the way we thought it would.

Instead of announcing a production cut extension to the end of Q1 back in September 2024, OPEC+ chose the slow-and-steady approach of first announcing a production cut extension until November, followed by another month of delay.

With the OPEC+ meeting now delayed to Dec 5, the market expects a rollover of the current production cut to the end of Q1. Anything less than this and readers should expect the oil market to sell off.

But I suspect the Saudis are fully aware of this, and I think this is why the latest OPEC+ meeting got delayed because they want to address the +300k b/d increase from UAE in 2025 (over 9 months).

From a game theory standpoint, the UAE has everything to lose for not agreeing to a deal with the Saudis.

Historically speaking, UAE, Saudi, and Kuwait have always moved in tandem when it came to production policy. But this started to change after COVID. UAE has invested heavily in expanding its spare capacity and it wants to bring some of those barrels online. But as we've seen time and time again, Saudis are fully aware of the fact that just because you have spare capacity (Saudi holds ~3 million b/d at least) doesn't mean you should use it.

We suspect that the Saudis want to "deliver" a positive surprise for the market and if it means that UAE adheres to the current production quota for another 3 months, it would be perceived as a positive despite the negligible increase in production (+100k b/d).

From an oil market balance perspective, if OPEC+ agrees to extend the production cut to the end of Q1, it would eliminate a bulk of the surplus expected for 2025.