Why OPEC Can’t Afford To Reverse Oil Output Cuts

OPEC is unlikely to reverse any of the production cuts that it approved last year as growing production from non-cartel countries is on the rise, pressuring prices.

The observation, made by BP’s chief economist Spencer Dale, could inject some optimism into oil markets, where many appeared to expect that the very mention of a possibility for a reversal makes that reversal a certainty.

OPEC earlier this year said that given the right market conditions, it could begin to roll back the cuts—a total of 2.2 million barrels daily for the group and its OPEC+ partners—in the last quarter of this year. For some reason, business media and traders took this to mean that the right market conditions will manifest themselves, basically guaranteeing the rollback. Ironically, that perception removed those right market conditions from the scenario as it pressured prices.

To date, OPEC cannot afford to bring a single barrel back to the market, especially as it continues dealing with members that do not stay within their quotas. A bigger threat, however, is growing production in the United States, Guyana, and Brazil, according to BP’s Dale.

These three are regularly referenced in discussions about global oil supply and the rivalry between OPEC and non-OPEC producers for control of the market and international prices. The U.S. is clearly the biggest factor, with production there adding about 1 million barrels daily last year—but widely seen growing more slowly this year.

The Energy Information Administration forecast production growth at a modest 300,000 bpd this year in its latest Short-Term Energy Outlook, where it also revised down its oil demand growth projections for the year to 1.1 million bpd.

Oil demand is the crucial factor for production plans, of course, both among OPEC members and non-OPEC producers—and it does not guarantee continuous strong growth. Brazil, for instance, saw its oil output add 13% last year to a record high of over 3.4 million barrels daily. This year, however, production growth has wobbled, and in April, the total fell back to some 3.1 million barrels daily.

The country has plans to boost its output of crude oil to 4.4 million barrels daily by 2034, which would be 47% higher than the current level of production, but achieving those plans would depend on prices—and demand.

Guyana—the other producer that BP’s Dale mentioned as a key factor in oil these days—has been expanding its production rather consistently over the past few years. Still, it bears noting that it started from zero back in 2019, reaching a production rate of over 600,000 bpd this year as Exxon ramped up at the Stabroek Block. The EIA forecast in its latest STEO that Guyana’s output will rise further to over 800,000 bpd next year.

So, if the forecast crude oil production growth materializes, it would certainly make it even harder for OPEC to roll back those production cuts as the combined growth of the United States and Guyana would come in at over 1 million barrels daily, essentially offsetting about half of the OPEC cuts. OPEC is indeed in a tight spot. But here’s the thing—the oil market appears to be in a deficit.

Global oil inventories are on a consistent decline path, and the EIA recently forecast that supply will fall short of demand for oil by some 750,000 bpd in the second half of the year, which was an upward revision from an earlier projection of 500,000 bpd. The oil market is in a deficit, and prices are still down. OPEC will not be rolling back the cuts any time soon.