{"id":10613,"date":"2024-05-04T12:05:32","date_gmt":"2024-05-04T12:05:32","guid":{"rendered":"https:\/\/roydadnaft.ir\/English\/?p=10613"},"modified":"2024-05-04T12:05:32","modified_gmt":"2024-05-04T12:05:32","slug":"opec-likely-to-extend-production-cuts-in-june","status":"publish","type":"post","link":"https:\/\/roydadnaft.ir\/English\/10613\/","title":{"rendered":"OPEC+ likely to extend production cuts in June"},"content":{"rendered":"

RoydadNaft – <\/a><\/span>\u00a0Saudi Arabia and its allies in OPEC+ are likely to keep oil production unchanged for a further three months when ministers review output allocations on June 1.<\/p>\n

The tightening of petroleum supplies and depletion of inventories widely anticipated at the start of the year has failed to materialise so far.<\/p>\n

If OPEC+ (Organization of the Petroleum Exporting Countries and allies) officials had hoped to increase production into a tightening market characterised by rising oil prices they are likely to be frustrated.<\/div>\n

Crude stocks, futures prices and calendar spreads are all at similar levels to a year ago, making a significant increase in output unlikely.<\/p>\n

The group may nonetheless decide it needs to rescind some of last year\u2019s output cuts to pre-empt a further rise in production from the United States, Canada, Brazil and Guyana and avoid conceding more market share.<\/p>\n

But current market conditions mean any increase is likely to be symbolic, in the absence of a wholesale shift in strategy to increase volumes and accept lower prices.<\/p>\n

PRICES AND SPREADS<\/h2>\n

Front-month Brent futures have averaged $84 per barrel so far in May putting them exactly in line with the average since the start of the century after adjusting for inflation.<\/p>\n

Prices have risen by just $6 per barrel, or 7%, compared with a year ago when the group was planning production cuts to boost them.<\/p>\n

Brent\u2019s six-month calendar spread has traded in an average backwardation of $3.54 (86th percentile for all months since 2000) so far in May compared with $1.81 (60th percentile) this month in 2023.<\/p>\n

The increased backwardation implies traders see the market somewhat tighter than in 2023 with a greater likelihood inventories will deplete over the rest of 2024.<\/p>\n

But the backwardation has been breaking down in recent weeks and has already narrowed from an average of $4.86 (95th percentile) in April.<\/p>\n

Despite an increase in tensions across the Middle East, causing a temporary rise in the war risk price premium, there has been no actual impact on oil supplies, and the premium has largely faded.<\/p>\n

Diplomatic efforts have contained conflict between Iran and Israel, with no impact on either oil production or tanker exports from the Persian Gulf.<\/p>\n

Tanker traffic has been re-routed from the Red Sea and the Gulf of Aden around the Cape of Good Hope to avoid drone and missile attacks from Houthi fighters based in Yemen.<\/p>\n

US OIL INVENTORIES<\/h2>\n

In the United States, commercial crude inventories are at almost the same level as this time last year and close to the prior 10-year seasonal average.<\/p>\n

Commercial crude stocks amounted to 461 million barrels in April 26 compared with 460 million barrels a year earlier.<\/p>\n

Crude inventories were just 5 million barrels (-1% or -0.11 standard deviations) below the prior 10-year seasonal average.<\/p>\n

There have been no signs of a significant and sustained draw down of inventories that would indicate the market has been under-supplied.<\/p>\n

Most U.S. crude inventories are held at coastal refineries and tank farms along the Gulf of Mexico, which is also the region most closely integrated with the global sea-borne market.<\/p>\n

Gulf of Mexico stocks amounted to 262 million barrels on April 26, only 6 million barrels above the same time last year and 15 million barrels (+6% or +0.57 standard deviations) above the 10-year seasonal average.<\/p>\n

The United States is not the whole global market but given the efficiency with which traders move barrels to exploit local discrepancies between production and consumption, it is a good marker for the global balance.<\/p>\n

U.S. crude inventories, global futures prices and to some extent softening calendar spreads all point to a market fairly close to balance.<\/p>\n

Portfolio investors certainly seem to think so, with roughly equal upside and downside risks to prices.<\/p>\n

On April 23, hedge funds and other money managers held a net long position in futures and options linked to crude prices equivalent to 453 million barrels (46th percentile for all weeks since 2013).<\/p>\n

The position was an increase from 388 million barrels (29th percentile) at the same point in 2023 but was basically neutral.<\/p>\n

Neither fund managers nor physical traders are signalling the need for an increase in production from Saudi Arabia and its OPEC+ allies in the third quarter.<\/p>\n

PRODUCTION POLICY<\/h2>\n

Senior OPEC ministers and officials stress the group\u2019s policy is to be proactive and forward-looking.<\/p>\n

That may be true when it comes to reducing production to avert an increase in excess inventories and stabilise prices.<\/p>\n

When it comes to increasing production, however, the group has normally waited until stocks have fallen and prices have already risen significantly.<\/p>\n

In this instance, inventories and prices close to the long-term average imply ministers are likely to decide to keep output unchanged, based on their behaviour in the past.<\/p>\n

In the last decade, OPEC+ production cuts have propped up prices and supported continued growth in output from outside the group especially in the western hemisphere.<\/p>\n

Some members of the organisation have expressed concerns about the loss of market share and pushed to increase production.<\/p>\n

So far, Saudi Arabia has led OPEC+ in cutting production to reduce stocks and boost prices at the expense of volumes.<\/p>\n

There are questions about the long-term sustainability of this strategy, but so far there’s no sign of a fundamental rethink.<\/p>\n

If ministers eventually decide the loss of market share has gone too far, they could cite stronger forecast demand and a predicted future decline in inventories to justify boosting production.<\/p>\n

That would reveal a major change in strategy to prioritise volume over prices and there is no sign of it yet. If OPEC+ nonetheless decides to announce an output increase, it is likely to be small and symbolic.<\/p>\n

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