Another year, another set of challenges and dilemmas for OPEC+. The group is set to start unwinding its oil production cuts, but it will have to contend – once again – with many uncertainties and be ready to react to unpredictable events in 2025.
From demand concerns to supply uncertainties, OPEC+ has its work cut out for this year, too.
The alliance of OPEC and a dozen non-OPEC producers led by Russia will closely watch several major factors for global oil markets this year. These include whether China’s oil demand will rebound in 2025 following lackluster consumption and imports last year, how the incoming U.S. Administration will tackle China, Russia, and Iran, and whether incoming President Donald Trump will choose to impose tariffs not only on China but on major trade partners and allies, too.
All these are outside OPEC+’s control. But there is something the group can – or at least should – control: the level of compliance with its own oil production ceilings.
Rather than targeting a specific price of oil (preferably above $80 per barrel) or market share to recoup from non-OPEC+ producers, the key consideration for OPEC+ in both 2025 and 2026 is full compliance and compensation for historical overproduction, according to Bassam Fattouh, the Director of the Oxford Institute for Energy Studies (OIES), and Andreas Economou from OIES.
“These criteria are essential for the group’s cohesion and for the agreement to have its desired effects on market balances and shaping market expectations,” Fattouh and Economou wrote in an analysis this month.
“Achieving these criteria will also provide OPEC+ with more flexibility to navigate the current market uncertainties,” they added.
OPEC+, in early December, decided to delay the start of the easing of the 2.2 million bpd cuts to April 2025, from January 2025. The group also extended the period in which it would unwind all these cuts into the following year, until September 2026.
The alliance reiterated the importance of compliance with the cuts and the timely compensation for those producers who haven’t adhered to their assigned quotas.
The OPEC+ overproducers – OPEC’s Iraq and non-OPEC+’s Russia and Kazakhstan – still have work to do to fall in line. All three have pledged to compensate for previous overproduction with deeper cuts.
Russia, Iraq, and Kazakhstan submitted in July 2024 their compensation plans to the OPEC Secretariat for overproduced crude volumes for the first six months of 2024.
The cumulative overproduction in these six months was about 1.184 million bpd for Iraq, 620,000 bpd for Kazakhstan, and 480,000 bpd for Russia, OPEC said back then.
Russia’s plan envisages Moscow mostly compensating for its overproduction in the months of March to September due to the more challenging conditions in the winter.
Now the compensation period is also being extended until the end of June 2026.
Supply and Demand Uncertainties
This change in compliance and compensation timelines could alter market balances at a time when many other factors are at play.
Due to the OPEC+ decision to delay the start of supply additions to April 2025, the market surplus in 2025 may not be as large as previously feared, but a surplus we will see, analysts say.
The next OPEC+ moves will depend on a variety of market movers. OPEC and the wider OPEC+ group pride themselves on being proactive in managing oil market balances, but they may have to be reactive once again this year.
Supply from Russia and Iraq is already coming under pressure. On its way out, the Biden Administration just sanctioned Russia’s oil exports, traders, and tankers with the heaviest set of sanctions yet. This sent oil prices rallying above $80 per barrel in just two days.
The Trump Administration begins formally its term in office at the start of next week and more expansive sanctions from Trump on Iran are widely expected to follow soon.
India and China are already looking to source alternative supply as they are reluctant to deal with tankers, traders, and insurers explicitly sanctioned by the U.S.
If Russian and Iranian supply drops materially, the other OPEC+ producers could opt to return more barrels sooner rather than later.
However, non-OPEC+ supply is set to grow this year, too, led by the U.S., Brazil, Guyana, Canada, and Argentina. This growth could be enough to meet the expected growth in global oil demand, and the market could find itself in a surplus with additional OPEC+ barrels.
Moreover, the Trump Administration’s trade policies (read: tariffs) could slow economic growth in China, the U.S., and other major economies, potentially denting global oil demand growth in the near and medium term.
Geopolitics and the foreign and trade policy choices of the new U.S. administration will impact the world order and economy, and OPEC+ will have to carefully navigate through all these to remain a relevant force in the oil market.
By Tsvetana Paraskova for Oilprice.com
