U.S. crude oil falls more than 3% as OPEC+ plans to phase out voluntary production cuts

U.S. crude oil fell more than 3% on Monday as OPEC+ announced plans to phase out voluntary production cuts totaling 2.2 million barrels per day.

A coalition of eight OPEC+ members led by Saudi Arabia and Russia announced Sunday that they would begin phasing out those cuts over the course of 12 months starting in October.

The planned phase out, however, will be subject to market conditions and could be reversed, the producers said. OPEC+ is keeping separate tranches of production cuts totaling 3.6 million bpd in place until the end of 2025.

Here are Monday’s closing energy prices:

• West Texas Intermediate July contract: $74.22 a barrel, down $2.77, or 3.6%. Year to date, U.S. crude oil has gained 3.59%.
• Brent August contract: $78.36 a barrel, down $2.75, or 3.39%. Year to date, the global benchmark has gained 1.7%.
• RBOB Gasoline July contract: $2.33 a gallon, down 3.38%. Year to date, gasoline futures are up 11%.
• Natural Gas July contract: $2.75 per thousand cubic feet, up 6.53%. Year to date, gas is up 9.63%.

“Some people read the OPEC statement, particularly the part about the adding barrels back from the voluntary cut, as bearish,” Helima Croft, head of global commodity strategy at RBC Capital Markets, told CNBC’s “Worldwide Exchange.”

“They were pretty clear that this is going to be data dependent,” Croft said. “As we get to the end of August, if the fundamental picture looks worse than what we have now, they would pause that addition.”

Under the plan, more than 500,000 bpd would return to the market by December, and 1.8 million bpd would come back by June of 2025.

Bob Yawger, a futures analyst at Mizuho, said the structure of the market is weakening. The OPEC+ announcement will make traders reluctant to buy oil for delivery later this year due to worries that prices will fall as supply returns to the market, he said.

“Who’s going to step in and buy the back of the curve now?” Yawger asked. “Nobody because they may add barrels back to the market. Nobody’s going to buy November; nobody’s going to buy December. That’s going to kill the December 2024 contract,” he said.

Andrew Lipow, president of Lipow Oil Associates, said the decision will limit upside for crude prices. The production that the countries plan to add to the market from October 2024 through September 2025 is equivalent to OPEC’s demand growth forecast of 2.2 million bpd for this year, Lipow said.

“In essence, the volume that they’re putting back on the market is equal to the optimistic demand growth forecasts that OPEC has put out for 2024,” Lipow said. “And the upshot is that they are adding sufficient supply to meet the growth that’s anticipated in the market.”

OPEC+ faces a conundrum where member states’ budgets are under pressure from low oil prices, but at the same time they have to worry about higher oil prices hurting demand and pushing crude prices even lower than they desire, Lipow said.

“They’re kind of stuck in a box,” Lipow said of the challenge the cartel faces. Though OPEC+ faces challenges, the group has managed to keep prices elevated by enacting some 6 million bpd of cuts since October 2022, Lipow said. Oil prices would be substantially lower, likely in $50s per barrel range, in the absence of those cuts, he said.

Yawger said the prospect of oil at $100 per barrel is not likely anymore unless a geopolitical crisis causes a “total disaster” situation in the Persian Gulf or Arabian Peninsula.