November 17, 2023 | 14:36
Crude Oil Outlook: OPEC+ Back in the Hot Seat
Crude oil is under pressure once again with WTI falling to around US$75/bbl in recent days. This is well down from its pre-October 7 high, when it briefly touched $95 in late-September. Since then, it’s been all downhill as fears over a weakening global economy and, in turn, slowing global oil consumption have risen to the fore. Although such concerns are understandable, as a sharp economic downturn would alter the global oil supply/demand balance, we think rising production may actually be the bigger drag these days.
Circling back to the demand picture, it’s proven to be quite resilient. The International Energy Agency (IEA) recently estimated global oil demand would average 102 mb/d for the whole of 2023, compared to its original projection of 101.6 mb/d at the beginning of the year and 99.6 mb/d in 2022. Looking ahead, the IEA is forecasting total demand to increase by a lesser 930 kb/d in 2024, which is a reasonable assumption as global growth is expected to cool (not fall into recession). Note that OPEC is much more optimistic and is forecasting another hefty increase of 2.3 mb/d in 2024. One development that leads us to believe that the IEA’s projection is more realistic is that we would be surprised if demand from China, which has surged this year thanks to the petrochemical industry, continues at the same pace. The Middle Kingdom looks set to account for 1.8 mb/d of the total 2.4 mb/d increase in oil consumption this year.
On the flip side, it may come as a surprise to see that global oil supply is estimated to climb by 1.7 mb/d to average 101.8 mb/d in 2023, which will be a record high despite the large rollback in OPEC+ production. Robust output gains from the United States, Brazil and Guyana have helped offset the cartel’s cuts. Taking a step back, just imagine where the price of crude oil would be if the cartel was not curtailing production by roughly 5 mb/d. Thus, even though global oil supply is projected to edge up next year, OPEC+ will need to continue holding back production if it wants to place a floor under prices.
In fact, the cartel may need to make additional cuts if non-OPEC+ supply continues to expand at the same pace. We’ll get a good idea shortly as the cartel’s next meeting is on November 26. However, it may not be a straightforward meeting as we suspect that Saudi Arabia, despite its growing fiscal requirements to fund its large-scale infrastructure projects, is growing tired of carrying the load. The country is curtailing its production by around 3.0 mb/d (25% of total capacity), or 60% of OPEC+’s entire cuts. Meanwhile, a couple key cartel members are producing above quota. Iraq’s output stood at 4.4 mb/d in October (vs. target of 4.2 mb/d) and UAE was at 3.3 mb/d (vs. target of 2.9 mb/d). Furthermore, crude exports from Iraq could ramp up soon as an agreement has seemingly been reached to resume shipments from the Kurdistan region to Turkey via a pipeline that typically transports 450 kb/d. It’s safe to say that prior market concerns over peak oil supply back in early-2022 were premature. Cartel members are no longer struggling to meet their production quotas and U.S. production, at 13.2 mb/d currently, has surpassed pre-pandemic highs.
Key Takeaway: The ball is back in OPEC+’s court or, more specifically, Saudi Arabia’s, to adjust supply in response to sagging demand. As much as Riyadh doesn’t like it, we think it will continue to shoulder the majority of the cartel’s cuts. However, further supply cuts are not a slam dunk, as tensions within the cartel and geopolitical pressures are likely to continue mounting (e.g., Saudi-U.S. relations), which means more volatility ahead for the oil market.