Baghdad is the new Vienna: What to expect from the OPEC+ meeting

Ahead of the upcoming OPEC+ meeting, countries belonging to the so-called ‘Great Eight’ (Saudi Arabia, Russia, Iraq, UAE, Kuwait, Algeria, Oman and Kazakhstan) have seen a flurry of activity. Picking up from where the previous OPEC+ meeting left, with the in-person meeting taking place in Riyadh rather than in Vienna, the leading energy officials of Saudi Arabia, Russia and Iraq met in Baghdad to discuss policy ahead of the upcoming meeting. Even by OPEC+’s standards, the policy coordination was staggering, starting with a phone call between Russia’s President Putin and Saudi Crown Prince Mohammed bin Salman (November 13), all the way through OPEC’s Secretary General Haitham Al Ghais meeting with Russia’s Deputy Prime Minister Novak in Moscow (November 22).

Since September, we have been calling for postponement to OPEC+’s ambition of winding down voluntary production cuts. In our books, core product y/y demand growth next year would tick in around 750 kbd next year, relatively close to the 2025 annual increment for non-OPEC+ supply which we see at 950 kbd. Whilst the media narrative often portrays US shale as the largest competitor to OPEC+ barrels, that perception is going to gradually shift further down the road. The United States is looking ahead to its last year of crude and condensate growth in 2025, peaking by Q4 next year, following which output would already decline by some 100 kbd in 2026. Over the next five years, deepwater offshore will be the single largest source of supply increments, be that from Brazil’s prolific pre-salt reserves where Petrobras will seek to bring Buzios production to its alleged target of 2 Mbd or Guyana where the Yellowtail field will be tapped into Q3 2025. Norway’s single largest FPSO on record, the Johan Castberg, will be starting up next month and producing full capacity by the summer of next year. All these projects have a breakeven level around $35/bbl, making the oft-mulled scenario of OPEC+ flooding the market deliberately increasingly unlikely as time goes on. Most OPEC+ member would not be able to operate sustainably at those levels as their fiscal breakevens tend to be around $70-85/bbl.

Global commercial crude oil inventories, Bbbls.

Source: Kpler.

It would be interesting to see whether OPEC+ would extend its current production targets for just three months, or if the participating countries would be comfortable enough to postpone any change by six months. One could argue that the OPEC+’s strategy of ‘telegraphing small steps’ has been very efficient at perpetuating a backwardated market – the sentiment is always leaning towards more supply in the future, tightness in the now. Consequently, ever since the super-contango of 2020 there has not been a period of prolonged contango in the markets and opportunities for commercial storage plays have not been viable throughout that period. In a period of tepid demand, this might have staved off a higher build-up in inventory as commercial stocks continue to trend along the 2022-2023 trendline.

Saudi Arabia and Russia crude and condensate supply in 2000-2025, Mbd.

Source: Kpler.

In the grand scheme of things, any additional barrel that OPEC+ places in the market would deflate the outright price and buoy the voices in the market that believe that the ‘Great Eight’ has lost control of the market. OPEC+ maintains that it is a balancing mechanism for crude markets which continue to be wavering amidst supply disruptions, sanctions and anti-fossil-fuel regulations. In 2025, the only balancing act would be to keep production targets as they are currently. At the same time, it would be hugely erroneous to believe OPEC+ is an anachronism of the oil markets. In 2026, we see y/y demand growth slowing down to 600 kbd, however as the pent-up Brazilian supply bonanza decelerates and US shale starts to physically decline, non-OPEC+ production growth would ‘only’ accounts for 350 kbd. Into 2027-2028, OPEC+ would have similar windows of opportunity popping up, allowing it to gradually build back supply – either by means of higher targets or (perhaps more elegantly) without telegraphing anything, just by means of higher condensate supply.

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