Why the outcome of the OPEC+ meeting was positive and important
Three words sum up the recent ministerial meeting of OPEC+: Predictability, transparency, and stability.
The Organization of the Petroleum Exporting Countries and its 13 allies, known as OPEC+, had surprised markets with a voluntary cut of around 1.5 million barrels per day in April this year, which failed to achieve the desired result as New York oil futures were down 11 percent in May. However, over the oil producers decided to carry those cuts forward through the end of 2024. Saudi Arabia announced an additional further 1 million bpd cut through July.
This is significant as it represents 10 percent of Saudi production bringing it down to around 9 million bpd, the lowest level since June 2021. This is significant because it demonstrates the Kingdom’s willingness to do what it takes to achieve market stability or in the words of Saudi Energy Minister Prince Abdulaziz bin Salman: he would do “whatever is necessary to bring stability to this market.”
It is a sign that OPEC+ is concerned about the outlook of the global economy with China taking longer than expected to get out of the doldrums of its zero-COVID-19 policy and Europe’s lackluster economic performance where Germany — the erstwhile growth engine for the continent — just entered a technical recession due to the energy crisis and economic woes resulting from the Ukraine crisis.
Markets like predictability and that is what the OPEC+ decision provided by taking the April cuts through the end of 2024 rather than providing the usual 6-month time horizon spanning from one OPEC+ ministerial meeting to the next. It was a bit reminiscent of the deal Washington achieved with raising its debt ceiling, which also provided a relatively long-term perspective. Markets reacted well to that deal, as they did so far to the OPEC+ announcement. On Monday early afternoon, the Brent July contract was just shy of $78 — up by 2.4 percent.
Realism in the long run is always a good thing. In that context, the readjustment of production quotas is helpful because it reflects the situation of certain nations that had been producing well below quota for a protracted period of time while giving the UAE the opportunity to up its quota by 200,000 bpd. While it constituted a bitter pill for some countries, the adjustment of quotas is important in the light that the UAE had invested heavily in its capacity, a lot of which was underutilized in the aftermath of the pandemic-induced demand destruction.
After the meeting was concluded several African producers joined UAE Energy Minister Suhail Al-Mazroui, Saudi Energy Minister Prince Abdulaziz bin Salman and top OPEC officials in a press conference as a show of unity and support for the comprehensive agreement.
It was also significant that OPEC decided to review the production and quota of certain countries by IHS, Wood McKenzie, and Rystad Energy, which ensures transparency.
All in all, the June 4 meeting resulted in a comprehensive agreement that was designed to bring stability to markets through predictability of the time horizon and transparency in assessing production levels.
We live in times of unprecedented geopolitical and economic uncertainties, so hopefully the deal will have the desired effect. Stability is particularly important to ensure sufficient investment in the underinvested sector. OPEC Secretary-General Haitham Al-Ghais recently estimated the investment requirement at $12.1 trillion between now and 2045, which is a staggering number.
• Cornelia Meyer is a macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.