Take the Cuts One at a Time

OPEC spins barrels like plate spinners trying to dazzle the market without breaking anything, states Phil Flynn of PRICE Futures Group.

While the market seems confused about what this meeting accomplished and the tiers of many production cuts and production baselines, the reality is that OPEC exceeded expectations by extending most of its existing production cuts into the new year even as they start to wind some cuts down.

So, it’s best to take the cuts one at a time. In the beginning, OPEC Plus had originally agreed in October of 2022 to cut oil production by two million barrels a day. During the meeting, that original production cut will stay in place not only through the end of this year but into the 2025 year as well. Think of this as the granddaddy of all the production cuts. Later Saudi Arabia tried to get members to agree to an additional cut and produced a voluntary cut to 1.66 million barrels a day. That production cut had to be voluntary because of a disagreement between the original baseline from which many of the producers had to start counting.

The United Arab Emirates for example wanted to produce more oil because they had that capability, and they wanted a bigger chunk of the pie. The UEA did get an upgrade to its official production quota yesterday as they get to increase it by 300,000 barrels a day. That came after a previous adjustment of 200,000 barrels a day from 2024. This new quota is supposed to be phased in in January and their ability to produce oil will be 3.519 million barrels by September of 2025.

So, the voluntary cuts were meant to send a message to the market that while they did not change their quota, members would voluntarily do their part to try to support prices and make those speculators “Ouch like hell”, to steal a phrase from Saudi energy minister Prince Abdulaziz bin Salman. At the meeting, they agreed to extend that cut into 2025.

At the same time, they are setting the stage for unwinding some cuts next year and are telling the market that the reduction will be gradual and will be predicated on the demand for actual barrels of oil. So, in other words, if the oil demand falters, these cuts will likely stay in place. On the other hand, if demand starts to exceed supply this is the amount of oil they can bring on without even changing their original quota.

The third round of cuts of the voluntary 2.2 million barrels a day was announced between June and November of last year and was supposed to run out at the end of this month. They will be extended for another three months until the end of September; after that, they will start phasing the production caps out over the next year. This phase-out and production cut is being done based on what OPEC perceives as a demand for their product. Saudi Energy Minister Prince Abdulaziz bin Salman said following the deal's announcement they maintain the choice that we could pause or reverse. This is not new; we’ve been doing it over the last three years, and I think it has proven effective.”

So, if you do the math, if OPEC unwinds the cut as scheduled oil production by OPEC could increase by about 500,000 barrels a day to about 34.35 million barrels by the end of the year. Other producers that have been overproducing should reduce that a little bit because they are supposed to compensate for their overproduction. By the end of September 2025, it would imply that oil production could rise by an additional 1.92 million barrels a day to 36.27 million barrels a day which would have the market keep up with demand growth.

We think that the extension of cuts and the modest increases that are going to be dated should be supportive of the market. While oil prices are not rising from this level, we seem to be building a base at the lower end of the trading range.

It’s going to come down to demand a summer driving season kicks into high gear. Demand in recent weeks has been surprisingly weak and concerns about geopolitical risk factors have taken a back seat to concerns about rising interest rates.

Reuters reported that “An aide to Prime Minister Benjamin Netanyahu confirmed on Sunday that Israel had accepted a framework deal for winding down the Gaza war now being advanced by US President Joe Biden, though he described it as flawed and in need of much more work.” There are reports that Netanyahu is ready to go ahead with the first phase of this plan.

Demand ultimately, we still predict, will be a very tight market into the second half of the year. We still recommend that this is a good time to lock in some long-term options as we believe they are going to go up.

Like Black Rock CEO Larry think had a wakeup call in a speech over the weekend he is warning that the world is going to be short on power and that the power-to-power data centers are not going to be able to be maintained with uninterruptible power sources. “The world is going to be short power, short power. And to power these data companies you cannot have just this intermittent power like wind and solar. You need dispatchable power because you can’t turn off and on these data centers.” Is the same guy who was telling us to divest from fossil fuels. I think finally reality is starting to set in.

Fox Business reported in August of 2022 that, “A conservative consumer advocacy group issued an alert Wednesday urging Americans to be wary about investments managed by BlackRock, the world’s largest investment firm. Consumer Research warned that BlackRock uses its massive clout to push a “radical agenda” on consumers. BlackRock, which manages an $8.5 trillion global portfolio, has pushed so-called environmental, social, and governance (ESG) standards prioritizing green energy infrastructure like wind and solar development over traditional fossil fuel investments, the group said in the warning.

“BlackRock is using money that doesn’t belong to them to push an extreme agenda with no regard for American families who are paying the price not only now, but through their pension funds which are being weaponized to the detriment of their potential profits,” Will Hild, the executive director of Consumers’ Research, told FOX Business in a statement. “Consumers deserve to know where their investments are going, especially when it’s leading to higher costs everywhere from gas pumps and groceries to rent prices and housing costs,” he continued. Maybe they got through to Fink.

Natural gas is back on the rise! EBW Analytics reports that returning heat early this week, strong LNG feed gas, and falling storage surpluses remain supportive for natural gas over the next 30-45 days.

Technical suggest deeper consolidation after the steep May run higher, however—and near-term volatility may persist.

Learn more about Phil Flynn by visiting Price Futures Group.