Opec+ is running out of road
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
As far as jobs go, Opec’s has become one of the toughest around. It is one thing to try to stabilise a growing oil market, alternatively tightening and loosening the taps in order to smooth out cycles. It is quite another to attempt to hold prices artificially high, amid slowing demand growth and new pools of supply. Indeed, there are signs that the cartel and its outside supporters — the so-called Opec+ — may be running out of road.
That is one way to read this weekend’s announcement. While all the existing curtailments have been extended, the “voluntary cut” by eight members of 2.2mn barrels a day (mb/d) will gradually be reversed from October 2024, subject to market conditions.
It is not hard to see why Opec+ members — which have amassed 6.5m b/d of spare production capacity according to Goldman Sachs — might want to bring some of that back online. Yet the market will struggle to accommodate these extra barrels without prices falling. Already, non-Opec supply is rising more than demand, thanks in large part to the growth in US shale. It is forecast to do so next year as well.
Opec+ cannot count on demand growth to help it out of its tight spot. Consumption may peak as early as this decade, according to the International Energy Agency. Meanwhile, US shale and offshore plays such as Guyana have years of solid growth ahead of them.
But while the cartel may have to abandon any dreams of triple-digit oil, it has no incentive to completely throw in the towel and let production rip. For one thing, the cartel has a lot to lose. The market price needed to coax the marginal barrel into production is somewhere in the $50-60 per barrel range, according to Citi. That’s a long way below the current $78 per barrel. For another, it is not clear that it would help Opec+ regain its dominance.
Opec’s last attempt at a price war, in 2014, was predicated on the hope of knocking high-cost US shale producers out of the market. That industry has since tapped unimagined efficiencies, and the latest round of Permian consolidation should further contribute to falling production costs. Offshore fields have also become more efficient, with Guyana’s break-even below $30/barrel, according to Rystad Energy research.
That leaves the cartel in a tough spot. It can’t let rip but lacks the means to manage a well-supplied market without getting stuck in an endless series of irreversible cuts.
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