Mint Explainer: Why Opec+ is extending production cuts till June

The World Bank estimated global growth to slow to 2.4% this calendar, with developing countries projected to grow just 3.9%. Low-income countries are expected to grow by 5.5% and the advanced economies, by 1.2%. India is expected to be one of the best performers, estimated to grow more than 6% in 2024-25.

The extension of production cuts to cover the period when India will be holding general elections is discomforting for the government, though state-owned oil marketing companies are more likely to hold prices at the current levels. The Opec+ countries' decision has the potential to upset plans, if any, for big cuts in fuel prices just before the model code of conduct comes into force. To mitigate risks from oil price volatility and likely supply disruptions, India has begun talks with small non-Opec producers such as Guyana, Suriname and Namibia for sourcing arrangements. It will also source some supplies from Venezuela in lieu of outstanding dues to ONGC Videsh Ltd.

Mint explains why the Opec+ has curbed output and the demand outlook for the world.

What has been the trend in crude oil prices?

Crude oil price (Brent) has stayed below $100 a barrel since August 2022, after the sharp rise in the early days of the Russian invasion of Ukraine. While it has largely held above $80, the price dipped to the low seventies a few times in the past year. Significantly, prices have remained subdued despite tensions in West Asia, as the economic outlook is weak and demand is relatively muted. The decision to extend the cut in production for another quarter shows the oil cartel’s determination to keep prices above $80 a barrel.

Most Opec nations and allies depend on revenues from oil to keep their economies running and to invest in further development of their countries. This includes Saudi Arabia where its Crown Prince Mohammed bin Salman aims to transform his country into a high-tech hub and destination for global business and leisure, ahead of an era when fossil fuel will be replaced with cleaner sources of energy. The country would ideally like oil prices closer to $100 a barrel to fund these plans but that looks unlikely with the US as the largest producer and a leading exporter.

The 12-member Opec includes African nations such as Nigeria, Algeria and Libya while the allies include another 10 countries such as Russia, Mexico and Kazakhstan. Russia has also decided to cut production and exports over the next three months. Since it is one of the largest producers after the US and Saudi Arabia, and also one of the largest exporters, its decision might lead to some tightening of supply and firming up of prices.

What is the demand outlook for oil?

The International Energy Agency (IEA) said that the global oil demand growth is losing momentum and that the deceleration will gather pace in 2024. The agency estimates the pace of expansion to decelerate to 1.2 million barrels per day in 2024 from 2.3 million barrels per day last year. In its February report on oil market conditions, it said: “The expansive post-pandemic growth phase in global oil demand has largely run its course. The pace of growth has already eased sharply." China, India and Brazil are set to account for 78% of growth in global oil demand in 2024, which is forecast to reach a new peak of 103 million barrels a day, the agency said.

Opec is a little more optimistic about the growth in demand. In its February monthly oil market report, it said that the global oil demand growth is forecast to stand at a healthy 2.2 million barrels per day, to reach a level of 104.4 million barrels per day in 2024. The oil cartel estimates demand in the non-OECD countries to grow by around 2 million barrels per day, on a year-on-year basis, with demand driven by China. “Total world oil demand is expected to reach 104.4 million barrels per day in 2024, bolstered by strong air travel demand and increased road mobility, including on-road diesel and trucking, as well as healthy industrial, construction and agricultural activities, particularly in non-OECD countries," it said.

Yet, announcing the cuts by members, the OPEC said that it was aimed at supporting the stability and balance of oil markets and that the production volumes would be restored gradually subject to market conditions. Saudi Arabia will extend its cut of one million barrels per day which has been in place since July 2023. The second largest cut is by Russia, its production will be lower by as much as 471,000 barrels per day in June.

Why is Opec+ worried about stability in the oil market?

Rising production in the non-Opec+ countries will bring additional supplies into the market and weigh on prices. That will hurt the earnings of OPEC and its allies.

The Opec estimates the US, Canada, Guyana, Brazil and Norway will together produce about 1.22 million barrels per day during 2024, with the largest increase coming from the US. Crude oil output in the world’s largest economy is projected to increase to 29.40 million barrels per day, an increase of 540,000 barrels a day. Canada is expected to increase production by 240,000 barrels a day and Guyana by 200,000 barrels.

What will the extension of production cut by OPEC+ mean for India?

Over 85% of India’s requirement of crude oil is imported, most of it from the Opec countries and allies. A rise in prices could increase India’s import bill and the cost of its exports. Petroleum Planning and Analysis Cell data show that India imported 194 million tonne of crude worth $110 billion in the April-January period of 2023-24. The import bill for the corresponding period of last year was $136 billion.

Russia emerged as a major source in 2022, and continues to be so, after the nation came under sanctions imposed by Western nations when it started a war in Ukraine. Russia offered India mouthwatering discounts in 2022, bringing down the cost of India’s basket of crude from over $100 a barrel to about $80. While those discounts have mostly disappeared due to price caps for Russian oil, trade intelligence outlet Kpler estimates that India’s imports from Russia reached 1.73 million barrels per day last year.

India’s traditional key suppliers include Saudi Arabia, Iraq and UAE. Citing Kpler data, Opec’s February monthly report said 32% of India’s imports in December came from Russia, 22% from Iraq and 16% from Saudi Arabia. India’s imported crude is worth $39 billion from Russia, $23 billion from Iraq, $18 billion from Saudi Arabia and $7 billion from UAE, according to data published by the commerce ministry. Additionally, it imported crude oil worth $11 billion from the US, Brazil, South Korea and Malaysia.

The Opec+ countries' decision could disrupt any plan to cut fuel prices in India before the model code of conduct comes into force. However, given that the country is already importing from non-Opec+ countries and is in talks with more countries for supplies, the move by Opec alliance might not adversely impact India.