Oil surplus leads OPEC+ to hold off on production cuts

02/11/2024

Oil surplus leads OPEC+ to hold off on production cuts

The oil market situation today leaves OPEC+ with limited ability to intervene. Further production cuts are unlikely to improve oil prices or benefit the organization. The current abundance of oil supply has led OPEC+ to refrain from taking action, allowing the market to determine its direction. The oil prices, which range from $70 to $75 per barrel, currently seem to be satisfactory for both consumers and producers.

The surplus oil available in the market exceeds seven to eight million barrels per day, with OPEC+ holding about six million barrels in reserve due to its decisions to reduce oil production to support oil prices. Unfortunately, this is not effective given the weak oil demand, particularly as China’s overall economy is not moving forward to generate the necessary demand to strengthen oil prices.

Meanwhile, U.S. oil production continues to surge, potentially reaching 15 million barrels per day from 13.5 million, thus solidifying its position as the biggest producer globally. This increase is followed by Russia at 9.8 million barrels per day and Saudi Arabia at 9 million barrels per day. The gradual expected increase in OPEC+ voluntary production is unlikely to materialize in the next few years. The mechanism of increasing or decreasing oil production is no longer viable, and OPEC+ seems unable to make decisive moves beyond following market trends, with reluctance. This situation persists even though the two largest oil producers - Saudi Arabia and Russia - are part of OPEC, with Russia’s involvement intended to help stabilize prices and enforce some level of discipline.

However, this is ineffective as the U.S., Canada, and Brazil continue to ramp up oil production. OPEC+ has reduced its output to support prices, but these efforts have yielded little success. It appears that the approach of OPEC+ in terms of production cuts is unsustainable and unlikely to benefit the organization in the long term. Perhaps it is time for OPEC+ to consider a more flexible stance on oil production. Defending oil prices primarily benefits the U.S., which produces 13.5 million barrels per day. Instead, OPEC+ might consider accepting a price level of around $75 per barrel while also working on strategies to reduce reliance on oil income in the future.

By Kamel Al-Harami

Independent Oil Analyst

Email: [email protected]