OPEC Abandons $100 Oil Dream as Production Cuts Wind Down, Moody's Analytics Reports

OPEC+ has agreed to wind down voluntary production cuts, signaling a shift in strategy and potentially sending oil prices lower, Moody's Analytics observes in a note published on Thursday.

This decision marks a tacit admission by OPEC that its efforts to prop up oil prices have failed to achieve their intended goal. The group had cut production by 1.5 million barrels per day since the third quarter of 2022, which had helped keep prices elevated. However, these cuts also spurred a surge in US oil production, leading to a decline in OPEC's market share and an increase in its spare production capacity to 4.5 million barrels per day.

"OPEC's market share of global oil production has fallen 1.5%, and its spare production capacity has risen to 4.5 million bpd, well above the 20-year average of 3 million bpd," Moody's Analytics reports.

The decision to wind down production cuts will bring 1.4 million barrels per day of production on line between October 2024 and December 2025, exceeding the expected growth in global oil demand next year, even with a projected increase in non-OPEC oil production.

"This would be a more gradual unwinding of spare capacity, but an unwinding nonetheless," the note states.

The decision also signals that OPEC recognizes its current strategy is unsustainable. As a result, market participants are pricing in the risk of OPEC countries boosting production ahead of the planned increases. Oil prices had already fallen by about $6 per barrel after the OPEC announcement, and Moody's Analytics plans to lower its oil price forecast by $3 in June in response.

"With this decision OPEC is signaling that its cuts haven't been successful and are not sustainable," Moody's Analytics concludes.