By Giovanni Staunovo, Strategist, UBS Switzerland AG
Oil prices have given up all of this year’s gains, with prices now trading at the lowest level since December amid US tariff news and the announcement by OPEC+ that it will start bringing back production in April.
The eight OPEC+ member states with additional voluntary production cuts announced on March 3 that they plan to start unwinding their production cuts gradually from April, with an additional output of about 138,000 barrels per day (bpd).
The oil market did not like the news; oil prices have declined by about $2 a barrel over the past 24 hours on worries OPEC+ would bring back 2.2 mln bpd over the next 18 months.
The statement put out by OPEC+ suggests healthy market fundamentals were a factor in the decision to unwind the earlier voluntary cuts.
Cold weather in the northern Hemisphere and muted supply growth in non-OPEC+ countries in recent months resulted in world observed oil inventories falling to a multi-year low in January.
Additionally, the group retains a cautious stance on supply management, signaling a flexible approach in bringing back barrels. There is no pre-set course in adding barrels to the market; it will depend on market conditions, with the group reiterating again that the additions can be paused or even reversed if required.
By bringing forward the compensation cuts of past overproduction of some OPEC+ member states, the effective production increase will be smaller than the announced 138,000 bpd. Also, there is no indication that the group is fighting for market share; rather, the group is focused on supply management to keep the oil market in balance.
With the Trump administration revoking Chevron’s license to operate in Venezuela, there is room for a modest drop in Venezuelan output over the coming quarters. We are also closely watching to see if further US sanctions are announced to implement “maximum pressure” on Iran.
In the near term, US tariff news is likely to keep oil prices volatile, with further potential temporary price setbacks.
However, we retain our moderately constructive price outlook, and expect solid oil demand growth in 1Q25 and lower non-OPEC+ supply growth to support prices over the coming months.
