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OPEC+’s additional 900,000 barrels a day of voluntary supply curbs, agreed to just a few weeks ago, are a sticking point for analysts and traders trying to price in global demand and supply balances. Traders wonder if the group will deliver enough of the cutbacks to rein in the looming surplus.
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The cartel faces a “balancing act”, said Parsley Ong, head of Asia energy and chemicals research at JPMorgan Chase & Co. It “revolves around the fact that US producers are fundamentally price sensitive. The higher OPEC+ keeps oil prices by reducing production, the more traditional oil producers and US shale production will respond to that and boost supply.”
In the US, weekly crude production hit a record 13.3 million barrels a day last month, as drillers from the Permian Basin in West Texas to the Bakken Shale of North Dakota ramped up oil production well beyond what analysts foresaw. And in 2024, output is expected to set a new all-time high, according to the US Energy Information Administration. Brazil and Guyana are also set to boost supplies significantly, contributing to a wave of new crude from the Americas.
On the demand side, global consumption growth should slow as economic activity weakens, according to the International Energy Agency’s latest market outlook. The group forecasts demand will edge up by 1.1 million barrels a day this year.
While that’s less than half of 2023’s latest estimated growth rate, the figure is still high by historical standards. Consumption is normalising after the once-in-a-generation disruption caused by the pandemic and in the US, growing expectations of a so-called soft landing are buoying energy demand.
Still, the global picture is uneven with a rapid switch away from oil in some sectors. In China, Asia’s top crude importer, the electrification of cars is presenting structural headwinds for oil consumption, weighing on demand growth, said Anthony Yuen, head of energy strategy at Citigroup.
Analysts are mindful of geopolitical risks such as the Gaza-Israel war where Houthi militants have targeted Red Sea shipping.Credit: AP
“This is limiting oil’s sensitivity toward wider macroeconomic factors,” he said. “In the past, economic indicators might directly translate into higher ground transportation and fuel demand,” but this relationship now appears to be weakening as electric vehicle uptake increases.
Analysts are, however, mindful of geopolitical risks. Attacks in the Red Sea by Yemen-based Houthi militants remain in focus, and Russia is still waging war in Ukraine.
And ultimately, global producers still have the power to withhold output to meet demand trends, although that will boil down to discipline and intention.
“OPEC+ is interested in maximising their revenue, so it’s in their interest to consider producing more,” said Citi’s Yuen. “But I think it will depend on how production from non-OPEC sources pans out over next year.”
Bloomberg
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