Investing.com — Oil prices settled sharply lower Monday, as OPEC and its allies’ decision to extend output cuts into 2025, but also phase out the cuts later beginning later this year stoked worries about a supply surplus.
At 14:30 ET (18:30 GMT), West Texas Intermediate crude futures dropped 3.6% to settle at $74.22 per barrel, while Brent oil futures expiring in August fell by 3.4% to $78.36 a barrel.
The Organization of the Petroleum Exporting Countries and its allies including Russia, known as OPEC+, decided to extend its ongoing output cuts of roughly 5.86 million barrels per day well into 2025.
Specifically, it will maintain 3.6 million bpd of reductions until end-2025. Meanwhile, 2.2 million bpd of cuts will be prolonged by three months until the end of September this year and will then be gradually phased out from October until September 2025.
The decision to extend cuts will likely keep demand and supply in balance in the near term, but the move to begin phasing out production cuts from Q3 this year, could pose problems in 2025.
The phasing out “represents a stronger indication that extreme levels of market support by OPEC+ (principally Saudi Arabia) may not last forever,” Macquarie said in a note, warning that it “appears problematic for 2025.”
Other agree, with Goldman Sachs saying that the move could be bearish for oil prices.
“[T]he 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,” the Goldman Sachs analysts said in a note to clients.
OPEC+ said it was waiting to see a broader improvement in economic conditions and lower interest rates before it would begin increasing production.
Others, however, believe the phasing out of cuts won’t likely spark a material wave of OPEC+ barrels flooding the market and pushing prices lower.
“Some market participants think that OPEC+ may flood the market, but we disagree with that point,” UBS said. “The group still has flexibility and would likely only produce more if it believes those extra barrels will be absorbed by the market (from October at the earliest),” it added, maintaining its “modestly positive outlook for crude prices.”
(Scott Kanowsky, Ambar Warrick contributed to this report.)
This post is originally published on INVESTING.
