Oil inches lower as investors weigh up extended OPEC+ supply cuts


By Natalie Grover

LONDON (Reuters) -Oil prices edged lower on Monday as investors digested the complex deal brokered by producer group OPEC+ to extend various layers of output cuts, much of them into 2025.

futures for August delivery were down 42 cents at $80.69 a barrel by 1318 GMT. U.S. West Texas Intermediate (WTI) crude futures for July delivery slipped 45 cents to $76.54.

Some analysts described the group’s decision, agreed on Sunday, as incrementally bearish for oil prices.

The Organization of the Petroleum Exporting Countries and allies led by Russia, together known as OPEC+, are currently reducing output by a total of 5.86 million barrels per day (bpd), equating to about 5.7% of global demand.

The group agreed to extend much of its cuts well into 2025 to support the market in the face of softer-than-expected demand growth, protracted high interest rates in key Western economies, worries over slow demand growth in top oil importer China and rising non-OPEC production.

The deal includes extending 3.66 million bpd of cuts that were due to expire this year until the end of 2025.

It also prolongs 2.2 million bpd of voluntary cuts that were to expire at the end of this month but will now be kept in place until the end of September before they are phased out gradually by September 2025.

“Clearly the challenge for the group will be to hold or cut back if demand doesn’t prove as robust and we believe their strong cohesion should allow for greater flexibly, if needed,” J.P. Morgan analyst Christyan Malek said.

Given it was always planned that the 2.2 million bpd of extra cuts would be unwound gradually, Sunday’s decision was slightly downbeat, some analysts pointed out.

“The communication of a surprisingly detailed default plan to unwind extra cuts makes it harder to maintain low production if the market turns out softer than bullish OPEC expectations,” Goldman Sachs analysts said.

These eight core members account for only about 30% of global oil output, making it harder for the group to convince markets that it is able to support prices when the proportion of output it has effective control over is limited, said Callum Macpherson, head of commodities at Investec.

© Reuters. Freeport, Texas, April 27, 2020. REUTERS/Adrees Latif/File Photo

“Even achieving this (deal) has come at the cost of agreeing to output increases in 2025 on top of its plan to unwind the voluntary cuts. It is not clear the additional supply will find a home next year,” he said.

The front-month contract for Brent, for instance, has fallen by a few dollars since Reuters first reported such an OPEC+ deal was in the works last week.