(News Bulletin 247) – Oil contracts fell on Monday and are still suffering this Tuesday, while OPEC+ members marked the beginning of the elimination of certain production cuts.

Oil is struggling to cope with the shock of the last meeting of OPEC+, a cartel which brings together members of the Organization of the Petroleum Exporting Countries (OPEC) and their allies, such as Russia.

On Monday, black gold completely collapsed. The August contract on North Sea Brent lost 3.99% and that of July on WTI listed in New York lost 3.3%. This Tuesday the London contract dropped another 1.5% (to $76.96 around 11:10 a.m.) and the New York contract dropped 1.7% (to $72.7). The two black gold references have thus fallen below the 80 dollar mark and are even approaching the threshold of 70 dollars.

This fall in oil prices is dragging companies in the sector in its wake. The oil services group Vallourec lost 3.7% this Tuesday on the Paris Stock Exchange, after losing 0.2% the day before. Totalenergies fell 2% after losing 1.6% on Monday.

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Gradual end of certain production cuts

The fall in oil prices is linked to decisions taken by OPEC+ members. For several quarters, producing countries, notably Saudi Arabia, have decided to reduce production to support oil prices and thus stabilize the market. Riyadh in particular needs high prices to finance the diversification of its economy towards areas of activity other than oil, such as tourism.

On Sunday, OPEC+ extended three levels of production cuts, but not in the same way. Group reduction cuts of 2 million barrels per day as well as voluntary cuts of 1.65 million barrels per day are extended until December 2025.

Conversely, the third batch of additional production cuts of 2.2 million barrels per day, which was implemented in November 2023, will only be extended until next September. These cuts will then be gradually eliminated, month by month, until disappearing completely in September 2025. Eight countries (Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman) have implemented these additional cuts.

In other words, the cartel will begin to increase its production next September, and seems to be slowly throwing in the towel on these production reductions. This while the price of a barrel remained at a very low level before Sunday’s meeting.

A surplus next year?

“At first, the market may take issue with the proposed plans to increase production in the fourth quarter of 2024, as some expected the production cut to be extended until the end of the year. year,” explains UBS.

“While the objective of the 8 OPEC+ countries has always been to ‘gradually return’ the 2.2 million barrels per day of additional voluntary reductions (including the Saudi reduction of 1 million barrels per day) ‘under subject to market conditions’, we are surprised that these countries are now announcing a detailed timetable for disengagement in a context of recent surprises in the increase in stocks (of oil, Editor’s note) compared to our expectations”, notes Goldman Sachs.

The American bank estimates that OPEC+, which has a very optimistic demand forecast for this year (an increase of 2.2 million barrels per day while the bank is at 1.5 million), was able to act this decision to “discourage” oil-producing countries that are not members of OPEC.

“The communication of this gradual disengagement (of production cuts, editor’s note) reflects a strong desire to increase production due to high reserve capacities,” she also adds. Goldman Sachs considers that there is now a downside risk to its forecast of Brent crude trading between $75 and $90 per barrel over the course of the year.

According to Warren Peterson, raw materials strategist in Singapore at ING cited by Bloomberg, the production increases defined by OPEC+ will cause “a slight surplus” on the market next year.

OPEC+, however, specified that the gradual end of the 2.2 million additional production cuts could “be paused or reversed” depending on market conditions.