Explained: OPEC’s latest productions cuts and the road ahead for crude

The OPEC+ group has got used to springing surprises. Saturday’s announcement was only a mini-surprise: an increase of 548,000 barrels per day among the countries making voluntary cuts, effectively compressing four months’ gains, rather than three, into August. If this is all OPEC+ does for now, the impact is moderate – but what happens in October when the voluntary cuts are all gone?

The eight-member sub-group of OPEC+, which in November 2023 had committed to voluntary cuts of 2.2 million barrels per day, is now just one month away from unwinding them completely. If the production decision for September is another 548,000 bpd hike, that will end the voluntary cuts. Should OPEC+ have persisted with its 410,000 bpd increases, that would have left one small boost for October. So this latest decision effectively brings the end of cuts a month earlier, and, all other things being equal, adds about 4 million barrels to inventories, not a massive change.

This is not quite the end of the story. Planned “compensation cuts” for past over-production extend, for some members, to next June. They even increase in August and September, thus offsetting part of the planned production increase. The biggest part of the compensation, though, expires after September and October.

The northern hemisphere summer is a good time to unwind cuts – the US driving season, and the period of high air-conditioning use in the Gulf, boost demand. Since OPEC+ began easing the voluntary cuts from April, prices have not gone up much, but they have not gone down: $65.58 per barrel for Brent crude as the market was absorbing the double shock of Donald Trump’s tariffs and the accelerated OPEC+ increase, versus $68.30 on Friday. A brief spike caused by the Israel-Iran war has now evaporated.

OPEC+ can feel pleased. At current prices, its daily revenues are barely below the levels of early April, while allowable production (leaving aside the compensation cuts) is up 6 percent. It has regained market share, deterred competition from outside (largely US shale), and kept the group together while admonishing members who were not living up to their commitments, mostly Kazakhstan and Iraq.

These steps were unavoidable. The path ahead is more difficult. First will come the autumn season, generally softer for demand. By then, it will be clearer whose forecasts are more reasonable: OPEC, which sees demand rising 1.3 million barrels per day in both 2025 and 2026 while non-OPEC+ supply grows 0.8 million bpd this year and 0.7 million bpd next? Or the International Energy Agency, which has demand rising just 0.72 and 0.74 million bpd in the two years, while non-OPEC+ adds 1.4 and 0.84 million bpd?

Then, the question will arise of whether to begin unwinding the other OPEC+ cuts, i.e. those beyond the voluntary cuts by the group of eight countries announced in November 2023. These include 2 million bpd of cuts from October 2022 and 1.6 million bpd from May 2023.

A lot has changed since then. The UAE is the big winner, with investment in expanding capacity – now at least 4.85 million bpd - accompanied by an increase to its baseline production. Saudi Arabia also obtained a bumper boost to its allowable level in August. Kazakhstan’s August target level is still some 200,000 bpd below its actual production. However, some other members, such as Algeria, Oman, Kuwait and the big one – Russia – are running out of road for further increases. So are Nigeria, which was not part of the November 2023 voluntary cuts, and the gaggle of smaller members such as Congo and Azerbaijan.

Then there are the three exempt countries: politically-troubled Iran, Libya and Venezuela. Iran’s production is holding up remarkably well despite intensified US sanctions and the effect of the short war with Israel. Libya launched its first bid round for 18 years, to be held in November, as part of plans to raise production to 2-3 million bpd by the end of the decade, from the current 1.3 million bpd.

So by the end of the year, OPEC+ will need to take stock of the position following its voluntary cuts, and chart the next steps. A grand realignment of quotas will require some hard bargaining. Countries will resist cuts to their quota even when they cannot actually produce up to the required level. The big gainers in the interim – Iraq, the UAE and Kazakhstan – will seek formal acknowledgement of their status. If there has been some kind of a US deal with Iran to ease sanctions, it too may come under pressure to sign up to a limit, but Tehran will strongly resist.

Saudi Arabia is the key balancing point in all this: the unwinding of the voluntary cuts takes it to 9.978 million bpd of production; the elimination of the May 2023 cuts would see a further boost to 10.478 million bpd. This leaves about 2 million bpd of spare capacity, a probably acceptable and prudent level.

Such a reset will be easier if prices remain reasonably strong, and if US shale output is showing signs of dropping off. Otherwise, OPEC+ may settle for a sequence of fudges. If market condition have really deteriorated, the relaxation of the earlier tranches of cuts could be postponed – but Riyadh will probably want to allow time for its policy shift of gently exerting pressure to show results.

• Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis