OPEC’s Dilemma: Another Year of Oil Supply Curbs or Price Slump

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(Bloomberg) — Bloomberg reporters will discuss OPEC+ options in a live Q&A session on Wednesday, November 27, at 9 a.m. ET. The Q&A is free and available for anyone to listen to here.

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When OPEC+ ministers meet this weekend, they face an unpalatable choice: continue to limit oil supplies until 2025, or risk renewed price declines.

With oil demand slowing in China and supplies swelling across the Americas, delegates say the group led by Saudi Arabia and Russia is once again discussing postponing its plans to increase production – perhaps by several months.

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But if OPEC+ wants to prevent a glut, it may need to do more. The International Energy Agency expects a surplus next year even if the cartel scraps supply increases entirely. Citigroup and JPMorgan Chase & Co. have warned that prices are already set to fall from $73 a barrel to $60 – and lower if the group opens the taps.

Another sell-off would cause financial pain for the Saudis, who have already been forced to cut spending on grandiose economic transformation plans. And that’s before the oil market considers the return of President Donald Trump, who promises to boost US crude oil production and threatens to impose punitive tariffs on China.

“I think there is no room for them to increase, and the market will remind them of that when necessary,” Torbjørn Tornqvist, co-founder and CEO of Gunvor Group, said at the Energy Intelligence Forum in London on Tuesday.

Earlier that day, Saudi Energy Minister Prince Abdulaziz bin Salman met with Russian Deputy Prime Minister Alexander Novak and Iraqi Prime Minister Muhammad Shiaa Al-Sudani in Baghdad. They discussed the importance of maintaining market balance and fulfilling production reduction commitments, according to the countries’ statements. The 23-nation coalition will meet online on Sunday.

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When the Organization of the Petroleum Exporting Countries and its partners last met about six months ago, the picture was very different. Based on its confidence in the continued rise in global oil consumption after the pandemic, the group revealed a roadmap to restore production halted since 2022, setting out the return of 2.2 million barrels per day in monthly installments starting in October.

But things have changed since then.

Brent crude futures have fallen about 17% since early July – ignoring the conflict in the Middle East – while demand in China has contracted for six months in a row as it faces a host of economic challenges. Chinese consumption – which has powered oil markets for the past two decades – may have already peaked, according to the International Energy Agency.

Next year, global oil demand will grow by about 1 million barrels per day next year – less than half the rate expected in 2023 – as the pace of the shift from fossil fuels to electric cars increases, the Paris-based agency predicts.

It says this will be overwhelmed by a wave of new supplies from the United States, Brazil, Canada and Guyana, leaving a surplus of more than 1 million barrels per day.

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“The oil market appears to be heading towards a significant surplus in 2025,” said Martin Ratz, an analyst at Morgan Stanley.

The risky outlook for OPEC+ comes even before oil markets absorb the impact of a second term for Trump, who has promised the US oil industry to “drill, baby, drill” and warned of draconian trade tariffs on a number of countries, including China. .

Iran and China

However, forecasts can often go astray, and if oil markets defy bearish forecasts, that will make OPEC+’s job easier.

Global oil demand continues to surge and appears set for strong growth in the next five to 10 years, BP CEO Murray Auchincloss said at a conference in London on Monday.

Oil prices are currently “trying to price in a future supply glut that has not yet arrived,” said Jeff Currie, chief strategy officer for energy pathways at The Carlyle Group. Falling prices are already eroding expectations for supply growth, making a glut less likely.

“Almost all bear markets are demand-driven, and with China moving ahead with stimulus, the odds of an unexpected demand shock are limited,” Currie said.

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There is also the possibility that Trump will renew the “maximum pressure” campaign used to throttle crude oil exports from Iran during his first term, in an attempt to curb the country’s nuclear program.

“If the current Trumps do everything they can and they cut 1 million to 1.2 million barrels of Iranian oil exports, that would eliminate the oversupply next year,” said Bob McNally, founder of Rapidan Energy Group and a former White House official. . “This makes it much easier for OPEC+ to return those barrels.”

But in the absence of a tough crackdown on Tehran, OPEC+ countries may need to persevere with their cuts. This would pose a challenge for many members – particularly Iraq, Russia, Kazakhstan and the United Arab Emirates, which have struggled to implement the supply restrictions they were supposed to implement at the beginning of this year.

The UAE is permitted to gradually begin adding an additional 300,000 barrels per day of additional production in recognition of recent increases in its production capacity. There is no such allowance for Kazakhstan, where the start of a major expansion of the Tengiz oil field could test its commitment to the OPEC+ deal next year.

The longer the surplus continues, the more likely it is that OPEC+ members will eventually tire of quotas and return to seeking individual market share, as they did during the policy “reset,” said Natasha Kaneva, head of global commodities research at the OPEC+ Institute. In 2014 and 2020. JP Morgan.

“Increasing oil production may become a key consideration for some OPEC members in 2026, when there is a high risk of the market resetting again,” she said.

-With assistance from Nayla Razouk, Ben Bartenstein, Manus Crane, Fiona Macdonald, Salma El Wardani, and Archie Hunter.

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