Oil prices are barely above $70 a barrel despite recent production outages in the United States due … [+] to Hurricane Francine and Libya due to the political turmoil. (AP Photo/David Zalubowski)
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OPEC+ is in trouble. Benchmark Brent oil prices are barely above $70 a barrel despite recent production outages in the United States due to Hurricane Francine and Libya due to the political turmoil in the North African country.
The cartel has responded by delaying the return of some oil production that it had cut previously to support oil prices. Rather than hiking output in October, as planned back in June, the group aims to start unwinding these cuts in December.
But there’s no guarantee that an oil market well-supplied with crude from non-OPEC producers, led by the United States, Brazil, Guyana and Canada, will have room for more OPEC+ barrels in December or 2025.
That is a tough pill to swallow for OPEC+, which is officially holding back roughly 5.9 million barrels a day (b/d) in production from the market. About 2.2 million b/d of these are voluntary cuts from Saudi Arabia and seven other OPEC+ members. These voluntary cuts are first in line to be rolled back, while a further 3.7 million b/d of collective OPEC+ cuts are already locked in through the end of 2025.
Weaker-than-expected oil demand is the main culprit in this dilemma. OPEC started this year with a robust oil demand growth forecast of 2.25 million b/d, a bold prediction that raised eyebrows among other forecasters. The International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) forecast demand growth to be closer to 1 million b/d this year.
However, all three organizations have been revising their demand forecasts recently. The IEA and EIA now put their 2024 growth forecasts at around 900,000 b/d, while OPEC has come down slightly to 2.03 million b/d. However, the important takeaway from OPEC is that it has lowered its estimate for each of the last two months, which likely points to further downward revisions in the coming months.
China is the biggest problem. For years, China has driven global rises in oil consumption. However, the IEA has warned that slower Chinese economic growth and a shift towards electric vehicles (EVs) have changed the paradigm for the world’s second-largest economy. It now sees Chinese demand rising by just 180,000 b/d in 2024 – down from 410,000 b/d seen in July – as a broader economic slowdown coincides with more electric vehicles (EVs) and as the development of a high-speed rail network restricts domestic air travel growth. Meanwhile, OPEC is still counting on China to deliver 650,000 b/d of demand growth this year.
Demand is also under pressure in other large economies. Gasoline use in the United States has dropped year-on-year in five of the first six months of this year. “Outside of China, oil demand growth is tepid at best,” the IEA stated in its latest monthly report.
Meanwhile, growth in non-OPEC supply keeps eating up any gains in global demand. The IEA forecasts non-OPEC growth at 1.5 million b/d this year and next, with higher production from the United States, Guyana, Canada, and Brazil. America alone is expected to contribute growth of 400,000 b/d this year and a further 400,000 b/d in 2025, according to EIA.
The combination of soft demand and robust non-OPEC supply helps explain the recent drop in oil prices to around $70 a barrel. And while typically lower prices would induce a negative supply response by reducing oil company earnings and capital expenditure plans, that’s not likely to be the case this time.
After an intense capital efficiency drive, international oil companies (IOCs) look much more resilient to lower prices than they did a decade ago. ExxonMobil says its supply cost from its expanded Permian Basin portfolio following its $60 billion acquisition of Pioneer Natural Resources earlier this year is $ 35 a barrel. And it’s not just U.S. shale players slashing breakeven costs. French major TotalEnergies, which has significant offshore and Middle Eastern assets, says its company-wide breakeven price is anchored below $25/bbl.
That means a dip in oil prices will only affect these companies’ capital spending and production growth plans a little. A full-blown oil price collapse might be needed to trigger that.
And that’s unlikely to happen, because OPEC+ members require robust oil prices to keep their state budgets balanced. The IMF estimates that Saudi Arabia has a fiscal breakeven oil price of $96/bbl for 2024. With the exception of the United Arab Emirates ($57/bbl) and Libya ($66/bbl), all other OPEC members have a fiscal breakeven oil price of $94/bbl or higher. The group needs high oil prices to stay in power.
Most oil market experts foresee a significant oil supply deficit for the rest of this year due to continued OPEC+ cuts, which should support oil prices. The EIA sees global oil inventories falling by 900,000 b/d in 3Q24 and by more than 1 million b/d through 1Q25. As a result, it expects Brent prices will rise from around $70/bbl now to an average of $82/bbl in December and $83/bbl in 1Q25.
However, that may not help OPEC+ bring back the massive amount of oil supply it now has on the sidelines because some forecasters see big surpluses developing in 2025. The IEA sees a surplus of 1 million b/d next year, while the EIA sees inventory builds averaging 500,000 b/d in the second half of 2025.
How OPEC expects to ease its supply cuts under these conditions remains to be seen. Looking at 2025, the cartel once again has the most bullish demand growth forecast at 1.74 million b/d, but after this year unfolded, this could be wishful thinking, too. What remains certain is the strength and resilience of non-OPEC producers, led by the United States, which will make it hard for OPEC+ to find any room to add barrels without sinking prices.
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Publish date : 2024-09-14 12:12:00
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