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OPEC+ changes method to safeguard market share: Kemp

Oil futures rates have been up to the most affordable level for four months and calendar spreads have plunged after OPEC+ ministers indicated their intent to begin increasing production from the fourth quarter of 2024.

Front-month Brent futures closed at $78 per barrel on June 3, the first day of trading following the OPEC+ ministerial conference on June 2, up just $2 per barrel compared with the exact same time in 2015.

Front-month Brent futures traded at a premium of $1.50 per barrel over contracts 6 months further forward (56th. percentile for all months because 2000) down from an average of. $ 2.85 (78th percentile) in May and $4.86 (95th percentile) in. April.

Chartbook: Brent calendar spreads

Following a hybrid conference held in Riyadh and online, OPEC+. revealed voluntary output cuts totaling up to 2.2 million barrels. daily (b/d) would be extended till completion of September 2024.

But the cuts will then be gradually phased out on a monthly. basis over the final quarter of 2024 and the first 3. quarters of 2025.

The scheduled production increases are subject to the caution. they can be paused or reversed based on market conditions,. ministers said.

But it is nevertheless a huge increment-- comparable to. roughly 18 months of normal development in international oil intake.

Inevitably, rates have actually fallen.


The scheduled production increases mark a modification of strategy. by OPEC+, led by Saudi Arabia, which had actually previously focused on. diminishing excess stocks and driving prices towards $100 per. barrel.

Instead, the group has switched its focus to stabilising, or. even restoring, some of the market share it has lost in the last. two years to competing manufacturers in the United States, Canada,. Brazil and Guyana.

Repetitive authorities and voluntary production cuts by Saudi. Arabia and other OPEC+ members have actually stopped working to raise costs,. though they most likely prevented a more serious decline.

Instead they have tossed a lifeline to higher-cost manufacturers. in the western hemisphere, motivating them to keep and even. boost output.

Dwindling OPEC+ market share has merely become too painful. and controversial to sustain; it brings unpleasant suggestions. about Saudi Arabia's function as a swing producer in the early. 1980s.

The scheduled increases are meant to signal there is a. limit to how far Saudi Arabia and its closest allies will cut. production on their own to support rates, and they do not. accept cuts are irreversible.

To stabilise and recapture market share, OPEC+ requires slower. growth in competitors' output and faster growth in consumption.

Both indicate lower costs to implement a slowdown in drilling,. promote fuel usage, and include more OPEC+ crude.

Extra production also implies stocks will be greater. than formerly expected, explaining the abrupt downturn in. spreads.


For OPEC+ to pump more, others should pump less, other things. equal, which requires lower costs to require a production. slowdown, especially in the price-sensitive and short-cycle U.S. shale sector.

Pre-announcing increases in OPEC+ production is meant to. avert even more increases in output by the U.S. shale sector,. partly through signalling and partly through lower costs. themselves.

By delaying the very first production increases till October,. and making them conditional on future market conditions, OPEC+. ministers have provided themselves some versatility.

Scheduled production increases can be delayed again if oil. intake development fails to speed up, stocks remain. comfy and prices stay under pressure.

However OPEC+ has actually signified an important shift in the direction. of policy. Having consistently thrown the shale sector a lifeline. in 2023, OPEC+ is preparing to squeeze it again in 2025.

Associated columns:

- OPEC? likely to extend production cuts in June (May 3,. 2024)

- Record U.S. oil and gas production keeps rates under. pressure (March 1, 2024)

- Western Hemisphere oil output surges, with a helping hand. from OPEC (February 21, 2024)

John Kemp is a market expert. The views expressed. are his own. Follow his commentary on X