OPEC Expected to Maintain Oil Production Levels in June Meeting

The Organization of the Petroleum Exporting Countries (OPEC) and its allies are likely to keep oil production unchanged for an additional three months when ministers convene on June 1 to review output allocations.

The decision is based on current market conditions, with inventories and prices near long-term averages. Brent futures have averaged $84 per barrel so far in May, in line with the average since the start of the century after adjusting for inflation.

Why this matters: The decision by OPEC to maintain oil production levels will have a ripple effect on the global economy, influencing inflation rates, trade balances, and economic growth. A stable oil market will also impact the energy policies of countries, shaping their transition to cleaner energy sources and mitigating the effects of climate change.

Crude stocks, futures prices, and calendar spreads are all at similar levels to a year ago, making a significant increase in output unlikely. The six-month calendar spread for Brent has traded in an average backwardation of $3.54 (86th percentile for all months since 2000) so far in May, implying traders see the market somewhat tighter than in 2023. However, the backwardation has been breaking down in recent weeks and has already narrowed from an average of $4.86 (95th percentile) in April.

In the United States, commercial crude inventories are at almost the same level as this time last year and close to the prior 10-year seasonal average. Crude inventories amounted to 461 million barrels on April 26, compared with 460 million barrels a year earlier. Gulf of Mexico stocks amounted to 262 million barrels on April 26, only 6 million barrels above the same time last year and 15 million barrels (6% or 0.57 standard deviations) above the 10-year seasonal average.

The tightening of petroleum supplies and depletion of inventories widely anticipated at the start of the year has failed to materialize so far. OPEC officials may decide to rescind some of last year's output cuts to pre-empt a further rise in production from the United States, Canada, Brazil, and Guyana, and avoid conceding more market share. However, current market conditions mean any increase in output is likely to be symbolic in the absence of a wholesale shift in strategy to increase volumes and accept lower prices.

While official discussions have not yet begun, Reuters reports that OPEC+ may extend voluntary production cuts beyond the second quarter of this year. JP Morgan has maintained its oil price forecasts unchanged, expecting the average price of Brent crude to reach $88 per barrel from May to September, slightly higher than the $84 per barrel average seen in May. The upcoming OPEC meeting on June 1 will provide clarity on the group's production strategy for the coming months, as they navigate a market characterized by stable inventories and prices near long-term averages.

Key Takeaways

• OPEC is likely to keep oil production unchanged for 3 more months.
• The decision would be based on current market conditions, with inventories and prices near long-term averages.
• Stable oil market to impact global economy, inflation rates, and energy policies.
• Crude stocks, futures prices, and calendar spreads are similar to last year, making output increase unlikely.
• OPEC meeting on June 1 to provide clarity on production strategy for coming months.