Will the OPEC output deal get extended?

November 2017 | Anna Nikitina and Jingrui Fang

The future of the OPEC, non-OPEC output cut agreement will depend on trends in global demand, North America shale supply, which could swing 600-700 kb/d either way, and fiscal pressures on participants. In our base case, we expect OPEC to extend the agreement until 2019 as crude prices remain depressed. Should shale growth exceed expectations, OPEC is likely to counterbalance global supply by deepening the cuts, which may prompt countries like Iraq to exit the pact. Meanwhile, strong demand growth, geopolitical supply disruptions and low drilling efficiency in the US shale will alleviate the need for further OPEC intervention.


Since its milestone agreement last November, OPEC has shown that it can still influence global oil prices by successfully coordinating a production cut of 1.8 million b/d between OPEC and non-OPEC producers. OPEC’s behavior over the next few years will continue to be one of key factors driving market direction.

Deal extension will see market tightening by 2020

OPEC has gone a long way to re-establishing stability in the crude markets over the last twelve months. From now on, market direction is expected to determine OPEC’s course of action, as the group and its allies continue to focus on rebalancing the market. Our base case scenario envisages Brent oil price at around USD55/bbl until 2020, followed by a gradual rise to USD70/bbl by 2022—in which case OPEC is likely to maintain its current supply cut agreement with its non-OPEC partners until 2019. But if prices increase in the short term on the back of strong demand or a supply disruption, the group is more likely to ramp up production to meet the additional demand. On the other hand, if strong production growth in US shale oil or rebound in countries such as Iran or Libya keeps prices lower than expected, then OPEC is more likely to deepen the cuts.

While there are risks to the up and downside, in our base case scenario we expect crude prices will remain low until 2020, due to moderate demand growth and continuous shale growth in North America reaching 6.6 MMb/d by 2021, which should initially outpace accelerating conventional non-OPEC legacy declines. Meanwhile, high level of compliance with the OPEC-Non-OPEC output deal to date would suggest the pact is likely to remain effective, in contrast to some similar deals in the past. If OPEC and its allies do choose to maintain the supply constraint successfully until 2019, then we expect the underlying impact of delayed non-OPEC FIDs to lead to an erosion of surplus stocks and tighter supply by 2020—prompting a sustained increase in prices towards USD70/bbl by 2022.

Rebound in countries like Libya or North America shale growth could undermine OPEC’s efforts

There is a risk of unexpected production growth from deal-exempt OPEC members—Nigeria, Libya and Iran. There countries could potentially add in excess of 1.5MMb/d if they fully utilize their spare capacities however it is highly uncertain if this is possible in the near-term. In Iran, significant production increase depends largely on foreign investment and the prospects are affected by the talk of new sanctions by the U.S. Libya is still 0.7 MMb/d below pre-war levels, we expect its output to remain around 1 MMb/d in the short-term as the country continues to suffer from supply disruptions and NOC budget constraints. Finally, Nigerian production has already rebound with a relatively small upside expected up to 2020.

In a more conservative market scenario, should high drilling efficiency be achieved and rig constraints fully eliminated, we see an upside of 740 kb/d to North American shale output by 2021, which may prompt OPEC to deepen the cuts further.

The main burden is likely to remain with existing participants, potentially triggering some of them to drop out of the agreement if the group agrees to cut more production. Of such likely candidates, Iraq would bear a particular risk to the market. A low-price environment will mean additional pressure on the Iraqi budget, which the government could face difficulties financing. We estimate Iraq will need to produce about 6-6.2 MMb/d by 2019 (which is 1.5MMb/d higher than current output) to maintain its budget commitments, assuming the current levels of spending continue. So far Iraq has managed to sustain budget deficits with the help of international loans, including USD18 billion from the IMF and USD12 billion from the UK this year. Going forward, loan repayments will add to fiscal pressures.

Higher demand and/or supply disruptions would mean no deal extension

At the other end of the scale, factors that could push up prices include supply disruptions resulting from political instability and economic turmoil—not least the latest tension between Qatar and its Gulf neighbors—along with strong demand growth linked to low prices and continued Chinese SPR build up. North America shale output could also be under threat from rig constraints and low drilling efficiency, compromising up to 600 kb/d by 2021. As such, prices rising to $55-60/bbl in the short term would alleviate the need for any further OPEC action.

In this scenario, we see the OPEC, non-OPEC deal dissolving and participants ramping up output to pre-cut levels to satisfy additional demand. This outcome has been looking increasingly likely over recent months as oil prices have ticked higher on the back of rising global demand forecasts from OPEC, easing US output growth and a slow erosion of historically high stock levels.


While OPEC has proven that it can still influence the market, its present role is mostly focused on maintaining prices in a narrow band near current levels—at least, until the accelerating declines in non-OPEC legacy production really begin to add up.

About the authors

Anna Nikitina is a Senior Analyst in McKinsey Energy Insights' Warsaw office and Jingrui Fang is an Analyst in McKinsey Energy Insights' London office.


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