Deeper oil production cuts could fuel price volatility, says expert
By Sajeev K Peter
KUWAIT: With OPEC+ countries extending their oil production cuts to the end of the year, the market could remain tight in terms of supplies and crude prices could continue trending higher under current conditions, said an oil market specialist on Tuesday. In an interview with Kuwait Times, George Khoury, global head of education and research at CFI, said demand levels, however, could remain a source of risks as economic conditions could deteriorate or remain below expectations in some parts of the world like in Europe or China.
Responding to questions related to oil production cuts from the OPEC+ to two-year low in July-August and the near-term and long-term outlooks for the oil market in view of the tightening supplies, he said some uncertainty remains around monetary policies in Europe and the US, which could have an impact on the global economy and demand for oil. “A rapid rise in oil prices could affect central banks’ efforts to fight inflation, creating incentives to keep interest rates at high levels for longer, in turn pressuring the demand side,” Khoury pointed out.
He said oil markets have already priced in the voluntary production cuts and have continued to integrate the impact of their successive extension in anticipation of further tightening in the market. “Demand is expected to continue to outpace supply, further expanding the deficit and pushing oil prices higher. However, unexpected developments like deeper production cuts or a deterioration in demand levels could have immediate effects on prices and could fuel price volatility,” he added.
When asked about the possible impact of the production cuts on Kuwait’s oil GDP, Khoury said a strong increase in oil prices could offset the reduction in production and exports. However, the impact of the production cuts is correlated to the strength of the demand for crude at a time when concerns about the health of the global economy remain important. “An insufficient rise in oil prices or a sustained weaker demand could have a negative impact on the economy of oil-exporting countries over the long run,” he argued.
Kuwait has announced its plan to continue its voluntary oil output reduction by 128,000 bpd until the end of 2024. This voluntary cut comes as a precautionary measure taken in coordination with the countries participating in the OPEC+ deal on the production cut which was announced last April. In May and June, Kuwait pumped 2.55 million bpd of crude oil, down from 2.65 million bpd in April.
According to Khoury, a strong increase in US oil production could affect the trajectory of oil prices and could dilute the impact of OPEC+ production cuts if new volumes are large enough to compensate for what the market lost. “However, the US ability to raise output levels could be limited and could leave oil prices on an uptrend overall. Moreover, under the current US administration, it is uncertain if further production will be enforced, especially considering the historically low levels of the Strategic Petroleum Reserve (SPR),” he said.
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