Will OPEC+ opt for this risky strategy to boost future oil demand?

A month before OPEC+ announces its decision on whether the gradual easing of ongoing oil production cuts will begin as planned in October, the market is rife with speculation about the group’s output policy.

The latest indication from OPEC+ sources that the thaw will begin as scheduled sent oil prices further below $80 a barrel on Friday. The market reacted to the possibility of higher supply at a time when demand appears unstable, particularly in the world’s biggest crude importer, China.

At the current level of $74 a barrel Brent as of Tuesday morning, prices look low for most OPEC+ producers, who need oil of at least $80 and even $90 to balance their budgets.

Weaker-than-expected demand, which even OPEC acknowledged in its August monthly report, and oil prices below $80 a barrel would typically signal that the OPEC+ alliance could delay the start of easing cuts.

But OPEC+ and one of its top officials, Saudi Arabia’s Energy Minister Abdulaziz bin Salman, are notorious for springing surprises on production policy, either to “burn their shorts” and make traders “have” either to show the market who is responsible for supply and who is proactively “stabilizing” the market.

OPEC+ may begin to ease cuts

Until a few days ago, most analysts believed OPEC+ would delay starting to roll back cuts as the group faces slower demand and bear market sentiment amid fears of slowing economies.

But reports and market speculation in recent days suggest that the OPEC+ production plan unveiled in June remains as is: start adding back 180,000 barrels per day (bpd) in October.

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The cartel and its Russian-led allies could opt to increase supply even amid weak current demand, hoping to boost demand in the medium term with lower oil prices, Reuters columnist Clyde Russell argues in his column.

The key question is whether OPEC+ producers would be willing to accept a “wage cut” in the short term to guarantee higher demand for their product in the medium term.

Adding more supply and falling prices could also play into the plans of U.S. producers, which could slow drilling activity if prices fall closer to break-even.

As they say, the cure for low prices is low prices. By allowing for cheaper commodity prices that are key to global economic growth, OPEC+ could hope for a rebound in demand, particularly in key importing countries in Asia, including China, which tend to buy and store more crude when prices are low. smaller.

Low prices could also ease inflation and prompt more central banks to start cutting interest rates, Reuters’ Russell notes.

Weak demand, strong supply growth

Currently, global oil demand appears to be missing OPEC’s expectations that consumption will rise by just over 2 million bpd this year.

Demand from China is weak, while concerns about US demand and possible economic slowdowns in America and Europe are weighing on market sentiment.

Even OPEC admitted in its latest monthly report that Chinese demand exceeded expectations. Disappointing data so far this year and expectations of weaker demand growth in China prompted OPEC last month to cut its forecast for oil demand growth this year and next, in the first downward revision since the organization issued its estimate initial for 2024 a year ago.

Oil demand is set to grow by 2.11 million bpd in 2024, a still “healthy” pace of growth, well above the historical average of 1.4 million bpd seen before the pandemic, OPEC said. But the latest estimate of demand growth is 135,000 bpd lower than July’s assessment of a 2.25 million bpd increase. The downward revision reflected real consumption data for the first and second quarters of this year, “as well as softening expectations for China’s oil demand growth in 2024,” OPEC said in its Monthly Oil Market Report (MOMR).

Despite OPEC’s first downward revision to its oil demand growth forecast for 2024, the gap between the cartel’s growth estimate and that of the International Energy Agency (IEA) is still 1 million bpd wider, with OPEC having a more optimistic view.

Most investment banks and analysts forecast oil demand growth this year at around 1.2 million bpd to 1.5 million bpd, less than OPEC’s bullish view but higher than the IEA’s projection of demand growth of around 1 million bpd for 2024.

Analysts have also recently cut their oil price forecasts due to slower demand and rising non-OPEC+ supply.

Morgan Stanley recently revised its oil price forecasts lower, reflecting expectations of increased supply from OPEC and non-OPEC producers amid signs of weakening global demand. The bank now anticipates that while the crude oil market will remain tight through the third quarter, it will begin to stabilize in the fourth quarter and potentially move into surplus by 2025.

Goldman Sachs last week cut its forecast range for Brent oil prices by $5 to $70-85 a barrel. Higher US supply offset some of the seasonal demand, according to the investment bank. Efficiency gains among US producers boosted shale supply by 200,000 bpd above Goldman’s expectations.

OPEC+ could decide to add supply to the market in a move that could “strategically discipline non-OPEC supply,” Goldman Sachs analysts wrote.

“Prices could outperform significantly in the near term, especially if OPEC strategically discourages stronger US shale growth or if a recession reduces oil demand,” the bank’s analysts noted.

By Tsvetana Paraskova for Oilprice.com

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