The eight OPEC+ countries that pledged additional voluntary output reductions in 2023 have announced that they will proceed with their plan to gradually roll back the reductions. A statement posted on OPEC's website on Monday revealed that Saudi Arabia, Russia, the United Arab Emirates, Iraq, Kuwait, Kazakhstan, Oman and Algeria will start unwinding a 2.2 million barrel per day cut from April. The press release stressed that the return of oil “may be paused or reversed subject to market conditions,” easing fears among traders who previously viewed the return of more barrels to the markets as a foregone conclusion.
The statement revealed that those countries that produced above tthe arget in 2024 will front-load their compensation plans. According to Standard Chartered, the m/m increase in targets in April amounts to just 135 thousand barrels per day. The increase could even be lower due to a potential offsetting effect of an acceleration in the payback of past over-production. The analysts have reported that current market balances imply that the unwind is unlikely to produce any significant surplus, with a mild surplus expected in Q4-2025 and Q4-2026.
Meanwhile, robust demand growth and a continued slowdown in U.S. oil liquids supply will create room for the cuts to be unwound. U.S. oil supply growth slowed significantly in 2024, with revised data showing U.S. crude oil output averaged 13.208 mb/d, good for a mere increase of 274 kb/d y/y following the 942 kb/d increase seen in 2023. StanChart has predicted that U.S. crude oil output will slow further to 231 kb/d in 2025 and just 66 kb/d in 2026.
The analysts have also weighed on the ongoing talks about a potential return of more Russian gas to European markets. Europe has cut Russian gas imports dramatically, with imports of Russian gas declining from about 450 million cubic meters per day (mcm/d) at the end of 2021 to about 150 mcm/d currently. There were plenty of discussion on the subject during the latest London’s International Energy (IE) Week. The Financial Times has reported about a plan by the former head of Nord Stream 2’s parent company to start up Nord Stream 2 with U.S. businesses buying the pipeline so as to act as middlemen between Russia and European consumers in the hope that would make flows seem more reliable. However, StanChart has pointed out that such a plan would need approvals from multiple jurisdictions, with the injection of U.S. interests not necessarily improving the reliability and supply security of Russian flows.
The other suggestion is that perhaps some Russian flows could resume into power generation as long as there is sufficient coal-fired capacity to fully cover should gas flows be constricted or cease. Similarly, StanChart has dismissed this plan as unlikely to work saying that such an arrangement would allow Russia to exert influence on Europe’s gas prices in the same way it did in the year leading up to the invasion of eastern Ukraine. In any case, increasing exposure to a hostile supplier with a track record of using gas supplies as political leverage would be unwise.
Meanwhile, European gas storage fundamentals have lately eased thanks to warmer weather in key consuming areas over the past week, although draws remain above average. According to Gas Infrastructure Europe (GIE) data, EU inventories stood at 44.58 billion cubic metres (bcm) on 2 March, leaving them 28.13 bcm lower y/y and 12.29 bcm below the five-year average. The w/w draw clocked in at 3.11 bcm, much lower than the 7.7b cm w/w draws recorded in mid-January and the 5.4 bcm draws recorded in mid-February, but still 23% more than the five-year average for the same week. Were this ratio to continue, the end-March level would be 38.5 bcm and if inventories were to follow the five-year average, the end-March level would be 39.7 bcm.
European natural gas futures have dropped below €41/MWh, the lowest level in three months, with forecasts for warmer weather expected to reduce heating demand. However, the market remains cautious due to ongoing geopolitical tensions between the U.S. and Ukraine. Further, a colder forecast for early next week introduces some uncertainty and potential for price increases. Last month, Europe absorbed most U.S. LNG exports, with strong demand driven by cold weather, reduced wind power generation, and lower Russian gas flows. A potential cold snap later in March could drive demand, and prices, higher. The European market also faces heightened volatility from U.S. tariffs on Canada, Mexico, and China, alongside concerns about the Trump administration halting military aid to Ukraine.
By Alex Kimani for Oilprice.com
