Explained: How will OPEC’s latest output cut extensions affect oil market balance in 2025?

The oil market is still expected to be abundantly supplied next year even after OPEC+ extended steep production cuts till the end of March. 

On Thursday, the Organization of the Petroleum Exporting Countries and its allies decided to delay the planned increase in oil production by three months till the end of March in order to maintain market balances. 

There have been growing concerns about a significant oversupply in the oil market next year in the absence of strong demand. 

OPEC was scheduled to unwind some of its steep voluntary production cuts and increase oil output by 180,000 barrels per day from January. 

However, crude oil prices have remained in a narrow range between $70-$80 per barrel for most of 2024 due to poor demand from top importer China. 

China’s crude oil imports have stopped rising in recent months, while for most of the year imports have been lower on average compared to last year. This is primarily because of struggling economic activities in the country and a shift to electric vehicles.

And, with non-OPEC oil supply rising, the cartel did not have much of a choice, but to extend its production cuts. 

“The reaction of oil market participants was moderate because the decision was largely in line with expectations,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report. 

Steep production cuts

OPEC and its allies agreed to extend their voluntary output cuts of 2.2 million barrels per day till the end of March. These cuts were set to expire on December 31. 

From April, the cartel will gradually unwind the voluntary output cuts over 18 months. Production will increase by 140,000 barrels per day, starting April. 

Total production cuts include 2 million barrels per day of reductions by the whole group and 1.65 million barrels per day by eight members of the OPEC+ alliance.

On top of these, another 2.2 million barrels per day of voluntary cuts by the same eight members had been in place since the start of 2024. 

The first two cuts of 2 million barrels per day and 1.65 million barrels per day were extended by a year till the end of 2026.

The postponement of the planned production increase by a further three months had been expected.

Lambrecht said: 

However, it came as something of a surprise that the reversal of the voluntary production cuts of 2.2 million barrels per day planned from April is set to take place over a longer period than previously thought.

She said that OPEC’s decisions reflect that the cartel believes it has little room to raise production. 

Market balance

“Even with yesterday’s (Thursday) decisions, the oil market is likely to be oversupplied next year because global oil demand is likely to rise less strongly than supply outside OPEC+,” Lambrecht said. 

Warren Patterson, head of commodities strategy at ING Group, said that the action taken by OPEC+ “eats quite heavily” into the projected surplus for 2025. 

“However, the extension and the slower return of barrels is not enough to push the market into deficit next year,” Patterson said in a note. 

“The move still leaves the market in surplus in 1H25, although admittedly the surplus is more manageable at around 500k b/d, compared to 1m b/d expected previously.”

The International Energy Agency expects growth in global oil demand to be below 1 million barrels per day next year, even lower than 2024. 

Moreover, oil production from non-OPEC countries is likely to rise by 1.5 million barrels per day in 2025, which will alone outstrip the whole of demand growth, the IEA said. 

This makes it difficult for OPEC to even raise output gradually after March as well. 

According to ING Group’s calculations, the oil market will be in balance during the third quarter of 2025, before returning back to surplus of 1 million barrels per day in the final quarter. 

“While the action taken by OPEC+ may potentially provide a higher floor to the market than previously expected, ultimately the group will still have to accept lower prices,” Patterson added. 

Oil price forecast

Oil prices fell on Friday even as OPEC agreed to delay production hikes for the next three months. 

Experts believed that the extension in production cuts and delay in output hikes have been perceived as poor demand worldwide, which weighed on sentiments. 

“OPEC+ faces the ongoing issue of growing non-OPEC supply and disappointing demand growth, largely due to China,” Patterson noted. 

According to ING, the downward pressure on Brent crude prices is slightly limited next year due to expectation of a smaller surplus due to OPEC’s extension of output cuts. 

ING’s previous forecast assumed Brent prices to trade at $69 per barrel in 2025 compared with the revised projection at $71 per barrel currently. 

“The fact that the market will still be in surplus means that there is still downside in prices from current levels, particularly in 4Q25,” Patterson said. 

Risks to this view include OPEC+ extending these cuts even further into 2025 and stricter enforcement of oil sanctions against Iran. 

Meanwhile, Commerzbank’s Lambrecht believes that the oversupply next year could “quickly evaporate” if oil supply from Iran and Venezuela is affected. 

Lambrecht added:

This risk does not seem to be sufficiently taken into account by the market at present, which is why we expect the oil price to rise next year