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Now it’s up to OPEC+

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All eyes are now back at OPEC+ after the recent fall in oil prices along with weakening crude curve structures and weakening economic statistics. OPEC+ will have to step up the game and give solid guidance of what it intends to do in 2024. If Saudi Arabia is to carry the burden alone (with only a little help from Russia) it will likely need to keep its production at around 9.0 m b/d on average for 2024 and drop it down towards 8.5 m b/d in Q1-24. This may be too much to ask from Saudi Arabia and it may demand some of the other OPEC members to step up and join in on the task to regulate the market in 2024. More specifically this means Iraq, Kuwait and UAE. The oil market will likely be quite nervous until a firm message from Saudi/Russia/OPEC+ is delivered to the market some time in December.

Bjarne Schieldrop, Chief analyst commodities, SEB

Saudi Arabia may get some help from President Joe Biden though as his energy secretary adviser, Amos Hochstein, has stated that the US will enforce sanctions on Iran on more than 1 m b/d. 

Brent crude fell 4.6% ydy to USD 77.4/b and over the last three trading sessions it has lost USD 5.1/b. This morning it is trading only marginally higher at USD 77.6/b which is no vote of confidence. A good dose of rebound this morning would have been a signal that the sell-off yesterday possibly was exaggerated and solely driven by investors with long positions flocking to the exit. So there’s likely more downside to come.

In general there is a quite good relationship between net long speculative positions in Brent crude and WTI versus the global manufacturing cycle. Oil investors overall typically have an aversion of holding long positions in oil when the global economy is slowing down. As of yet there are few signs that the global economic cycle is about to turn. Rather the opposite seems to be the case. Global manufacturing fell in October and yesterday we saw US industrial production fall 0.6% MoM while continued jobless claims rose more than expected and to the highest level in two years. This matches well with the logic that the strong rise in interest rates since March 2022 is inflicting pain on the economy with more pain ahead as the effect comes with a lag.

Most estimates are that the global oil market is running a solid deficit in Q4-23. The IEA has an implied deficit in the global oil market of 1 m b/d in Q4-23 if we assume that OPEC will produce 28 m b/d vs. a call-on-OPEC at 29 m b/d. But prices in the oil market is telling a different story with weakening crude curves, weakening refining margins and a sharp sell-off in oil prices.

For 2024 the general forecasts are that global economic growth will slow, global oil demand growth will slow and also that the need for oil from OPEC will fall from 28.7 m b/d to 28.4 m b/d (IEA). This is a bearish environment for oil. The average Brent crude oil price so far this year is about USD 83/b. It should essentially be expected to deliver lower in 2024 with the negatives mentioned above.

Two things however will likely counter this and they are interconnected. US shale oil activity has been slowing with falling drilling rig count since early December 2022 and that has been happening at an average WTI price of USD 78/b. The result is that total US liquids production is set to grow by only 0.3 m b/d YoY in Q4-24. This allows OPEC+ to support the oil price at USD 80-90/b through 2024 without fear of loosing a significant market share to US oil production. Thus slowing US liquids production and active price management by OPEC+ goes hand in hand. As such we do expect OPEC+ to step up to the task.

So far it has predominantly been Saudi Arabia with a little help from Russia which together proactively have managed the oil market and the oil price through significant cuts. Saudi Arabia produced 10.5 m b/d in April but then cut production rapidly to only 9.0 m b/d which is what it still produces. Its normal production is about 10 m b/d.

What has made the situation more difficult for Saudi Arabia is the combination of solid growth in non-OPEC supply in 2023 (+2.1 m b/d YoY; IEA) but also a substantial revival in production by Venezuela and Iran. The two produced 660 k b/d more in October than they on average did in 2022. So the need for oil from Saudi Arabia is squeezed from both sides.

All eyes are now back at OPEC+ after the recent fall in oil prices along with weakening crude curve structures and weakening economic statistics.

OPEC+ will have to step up the game and give solid guidance of what it intends to do in 2024. If Saudi Arabia is to carry the burden alone (with only a little help from Russia) then it will likely need to keep its production at around 9.0 m b/d on average for 2024 and drop it down towards 8.5 m b/d in Q1-24. This may be too much to ask from Saudi Arabia and it may demand some of the other OPEC members to step up and join in on the task to regulate the market in 2024. More specifically this means Iraq, Kuwait and UAE.

The oil market will likely be quite nervous until a firm message from Saudi/Russia/OPEC+ is delivered to the market some time in December.

Saudi Arabia may get some help from President Joe Biden though as his energy secretary adviser, Amos Hochstein, has stated that the US will enforce sanctions on Iran on more than 1 m b/d.

Inlägget Now it’s up to OPEC+ dök först upp på Råvarumarknaden.se.

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