It is perhaps unwise to attempt to rationalize the market reaction to the various June 2 OPEC+ meetings, analysts at Standard Chartered Bank, including Commodities Research Head Paul Horsnell, said in a report sent to Rigzone by Horsnell late Tuesday.
“It may be best to categorize the price undershooting as the consequence of markets that are dominated by a combination of extreme macroeconomic pessimism and speculative shorts, topped off with a layer of often over-enthusiastic algorithmic trading that crowds out more fundamentally based traders,” the analysts stated in the report.
“With front-month Brent trading at a four-month low below $77 per barrel at the time of writing, the fall amounts to over $8 per barrel from last week’s high, over $15 per barrel from April’s year-to-date high and about $4 per barrel from the last settlement before the OPEC+ meetings (31 May),” they added.
“To the extent that some media and analysts have (ex-post) justified the fall in prices, the dominant rationale given is that the market is concerned about a significant volume of OPEC+ oil returning in 2024,” they continued.
“The increase in output in 2024 is relatively small; targets for the eight countries involved are unchanged until October when subject to market conditions, the plan is to commence a series of gradual month-on-month increases that finish in September 2025,” they said in the report.
The analysts noted in the report, however, that they do not think this explanation holds much water.
“Assuming market conditions are such that the increases can commence, targets increase month on month by 180,000 barrels per day in October, 183,000 barrels per day in November, and 180,000 barrels per day in December,” they continued.
“The increase in Q4 relative to Q2 is therefore about 360,000 barrels per day, dependent on favorable market conditions; it may be significantly less depending on which payback schedules for past overproduction are in force and how assiduously they are being met,” they said.
“A small increase in Q4 signaled well in advance and very carefully flagged as being non-automatic does not, in our view, represent just cause for the scale of recent price declines,” they went on to state.
Assuming market conditions allow further increases, the month-on-month increases continue in 2025 at a faster pace of about 210,000 barrels per day, the Standard Chartered analysts noted in the report.
“If the market will take the oil at an acceptable price, the plan is to return the last of the 2.2 million barrel per day voluntary cuts (those announced in November 2023) to the market in September 2025; this would lead to a 1.73 million barrel per day increase in targets on average in 2024 relative to 2023,” they said.
“Should the market be unable to take that oil, then the return of the last barrels cut in November 2023 will be delayed. In all, the forward guidance seems complete and reasonable to us, and, most importantly, conditional on market conditions,” they added.
“General asset markets do not expect the FOMC to follow all its current forward guidance to the letter regardless of future data and events; however, the oil market seems to think that the forward guidance given by the eight OPEC+ countries concerned constitutes a determination to produce, whatever happens,” they continued.
The analysts also highlighted in the report that “most commentary seems to have concentrated solely on the plan to phase out the November 2023 voluntary cuts” but added that there were other “significant components to what was agreed on June 2”.
“One – the 1.65 million barrels per day of voluntary cuts agreed in April 2023 have been extended to the end of 2025. Two – the required production level for all OPEC+ countries across 2025 was reaffirmed. Three – agreement was reached in the long-running discussion with the UAE, resulting in a 300,000 barrel per day increase in the UAE’s required production level, phased in over nine months starting in January 2025,” the analysts said in the report.
“Four – the discussion of targets in light of third-party consultant assessments of capacity was postponed until late 2025 when it may be a basis for discussion of 2026 required production. Five – in signal of continued proactivity and response to market conditions, the Joint Ministerial Monitoring Committee (JMMC) was given authority to hold additional meetings should it choose to, as well as to request an OPEC+ ministerial meeting at any time,” they continued.
“Six – Iraq, Russia, and Kazakhstan agreed to produce a compensation schedule for H1 overproduction by the end of June, the transparency of which should make further overproduction, while not impossible, increasingly awkward diplomatically,” they went on to state.
In the report, Standard Chartered analysts said that they think the OPEC+ decisions will ultimately prove positive for oil prices.
“Most importantly, the likelihood of the most bearish tail-risk events materializing has been reduced,” they added.
“In recent months a significant volume of media commentary has described both the discussion with the UAE about the required production levels and broader assessment of capacity and associated discussions as immediate and existential crises for OPEC+,” they continued, noting that “neither of those issues is live ones anymore”.
“Commentators have complained that OPEC+ was generating bearish uncertainty by not having a declared plan for returning the November 2023 cuts to market; it now has that plan, complete with conditionality based on market conditions,” the analysts said in the report.
“All the issues that the commentators said OPEC+ would have difficulty agreeing on have been agreed, cohesion has been demonstrated and a proactive approach to future market management has been re-emphasized,” they added.
“Analysts wanted even more transparency and forward guidance and it has now been provided,” they continued.
In the report, Standard Chartered forecasts that the nearby future ICE Brent price will average $98 per barrel in the third quarter and $106 per barrel in the fourth quarter. The report showed that the nearby future NYMEX basis WTI price is expected to average $95 per barrel in the third quarter and $103 per barrel in the fourth quarter.
In a note sent to Rigzone by the Macquarie team recently, Macquarie strategists, including global energy strategists Walt Chancellor and Vikas Dwivedi, outlined that the latest OPEC+ outcome “supports near-term balance” but “appears problematic for 2025”.
In a report sent to Rigzone on Monday by the J.P. Morgan Commodities Research team, analysts at J.P. Morgan outlined that they view OPEC+’s latest move as “market neutral for global crude oil balances and prices in 2024”.
