Commodities

OPEC's surprise adds to risks of lower oil prices

07 March 2025 • 4 mins read

OPEC Secretary-General Haitham al-Ghais. AFP.

OPEC’s surprise move to proceed with planned production hikes poses downside risk to oil prices, absent other developments such as lower supply from Iran and Venezuela.
We lower our 12-month Brent forecast as higher cost of producing oil from US shale compared to OPEC’s “low” cost is set to disincentivise US drilling given prospects of lower oil prices.
It is possible that the unwind of voluntary cuts may not last the full extent, as OPEC+ has indicated it will remain sensitive to market conditions.

We had expected OPEC+ to extend production cuts once again. But OPEC+ surprised markets as delegates from the eight members holding the 2.2-mb/d of voluntary cuts announced they would proceed as planned with the unwind starting on 1 April. It also announced that, to partially offset this, OPEC+ has also agreed with countries which have overproduced volumes (including Iraq and Kazakhstan) that they would front-load their compensatory cuts. However, the precise plans for this have not yet been made public.

OPEC’s surprise move to proceed with planned production hikes adds to risk of lower oil prices

Source: Bloomberg, Bank of Singapore.

In our view, the OPEC+ announcement that it would start unwinding its voluntary cuts looks like a risky decision amid softer US sentiment data, tariff escalation and talk of easing sanctions on Russia. Oil markets have gone back to worrying about demand amid uncertainty fueled by tariff threats. The uncertainty around trade policy seems to have affected US business and household sentiment. A potential Russia-Ukraine ceasefire that paves way for sanctions relief on Russian energy also weighs on oil prices. But the failure of the US and Ukraine to sign a minerals deal increases the uncertainty regarding a potential ceasefire.

The unexpected OPEC+ move signalled a departure from the previous cautious approach that led the group to thrice delay the easing of its output cuts, which have now been in force for over two years. OPEC’s move poses downside risk to oil prices, absent other developments such as lower supply from Iran and Venezuela. Prospects of lower oil prices, however, would align with Trump’s push to lower energy prices.

The higher cost of producing oil from US shale compared to OPEC’s “low” cost is set to disincentivise US drilling given prospects of lower oil prices. As an example, survey data from the Dallas Fed shows that in the Permian Basin (the most productive basin in the US), the average new well needs WTI price to be around USD62-USD64 per barrel to breakeven. The Trump administration’s deregulatory policies are therefore unlikely to boost activity, but technology and efficiency gains will have more impact.

The OPEC+ statement left the door open to adjustments down the line depending on market conditions. It is possible that the unwind of voluntary cuts may not last the full extent. OPEC member states face rising breakeven levels for their oil, putting pressure on their fiscal budgets. The elevated budgetary needs of several OPEC members mean they will continue to favour maximising revenue by supporting oil prices.

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Author:

Sim Moh Siong

Bank of Singapore