(Bloomberg Opinion) — OPEC is like a tea bag: It only works in hot water. The late Robert Mabro, one of the most astute observers of the oil market, liked to say that the cartel only did its job when it was under prolonged financial pain. Judging by its latest actions, OPEC hasn’t yet realized it’s inside a kettle that’s heating up. Saudi Arabia, Russia and other oil-producing nations have now agreed to delay by two months a planned output increase that was set to begin in October. The delay came after Brent, the oil benchmark, fell to a one-year low below $75 a barrel. In the short term, postponing output increases until December should lend support to oil prices. By forgoing a 180,000-barrel-a-day increase in October and November, OPEC would keep the market roughly balanced next quarter, rather than creating a surplus. But if you look at the expected balance of supply and demand, OPEC is simply kicking the can down a very steep path.
In two months, the group will have to make another fateful decision. If it wants higher oil prices in 2025, it will have to do much more than delay the nearly 2 million barrels a day of extra production it had planned for late next year. It will have to cut output outright. If output is not curbed, further price declines are on the horizon. With Brent little changed on Thursday, the market appears to be in agreement. Yet as a group, OPEC is not remotely prepared for cuts. If anything, the timid agreement to delay production increases by two months, rather than a full quarter, or even indefinitely, indicates strong internal disagreement. Saudi Arabia wants higher prices even at the cost of lower output; many others think that is leading to endless losses of market share. Riyadh is unlikely to convince its allies of the need to cut output unless prices collapse. The kingdom is already struggling to rein in the United Arab Emirates, Iraq and Kazakhstan, which are cheating on their production quotas. Using Mabro’s analogy, the water is lukewarm. And even this coffee-drinking Spaniard knows that’s not enough for a good cup of tea. By keeping oil prices artificially high, Riyadh has been subsidizing higher-cost producers, such as those in the American shale patch. Sacrificing market share works if higher prices are achieved, but Saudi Arabia is so far getting the worst possible outcome: low production and low prices. Adjusted for inflation, oil prices are roughly the same as they were 20 years ago. But Saudi Arabia is producing less than it was in 2004. The situation is unlikely to change anytime soon. Currently, global demand has outstripped supply, as the northern hemisphere summer provided a seasonal boost to gasoline and jet fuel consumption. But in a few weeks, demand will begin to fall, as it does every year. With non-OPEC output rising, the cartel’s need for oil will decline in the fourth quarter to about 27.2 million barrels a day, roughly the same as its current output. During the first half of 2025, OPEC would need to produce much less — about 26 million — to keep the market balanced, according to the International Energy Agency. If it doesn’t, global crude stockpiles would swell, depressing prices.
So even if Saudi Arabia and its allies agreed in December to delay their production increases (and Thursday’s deal so far leaves production increases unchanged from December 2024 to November 2025), there would be a glut in the market for the first half. Lower oil prices would loom in early 2025. Wall Street banks, which often swing between extreme optimism and extreme pessimism, are warning of a price below $70 a barrel and warning clients of a risk of $50. Tactically, OPEC is also sending the worst possible message to the market. First, the deal speaks to the gymnastics the group is doing to preserve unity. Privately, I’m told, Riyadh, Abu Dhabi, Baghdad, Kuwait City, Moscow and Astana are not on board, however much they deny it in public. Second, it is a late admission that the market does not need the oil the group had anticipated. The Saudis are said to have superior market information, but this time they failed to deliver. And third, it does not address the first-half surplus of 2025, which would continue to fuel bearish bets. The only positive for OPEC is that the delay would plug a gap between now and the US election. Next time, the group would at least know who the next occupant of the White House will be, given their likely policies. Over the next few weeks, the water temperature will slowly rise. In December, the kettle should whistle. Then, and perhaps only then, could OPEC get into serious action. But I remain unconvinced that the cartel would unite to defend the high price that Saudi Arabia desires.
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Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He is co-author of “The World for Sale: Money, Power, and the Traders Who Deal in the Earth’s Resources.”
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