Growth in non-OPEC+ production is currently on track to see global output outpacing demand through 2024 [photo credit: OPEC]
The price action notwithstanding, further trimming may seem curious
at a time when, according to the IEA, the cuts already implemented…
…look set to keep the oil market in a significant deficit through
year-end, with the OPEC+ alliance pumping 900kb/d below the demand for
its crude.
What is happening here is the following:
- Growth in global output is beating forecasts “with October output
up 320kb/d [month-on-month]. Record output from the United States,
Brazil and Guyana underpin this year’s 1.7mb/d increase in global oil supplies, to a record 101.8mb/d”; and,
- “In 2024, non-OPEC+ producers will continue to lead global growth, projected at 1.6mb/d, to an unprecedented 103.4mb/d”.
The impact of this is nothing like as dramatic as we saw in 2014-16 when US tight oil
was seriously eating into OPEC market share. But cuts in output by
OPEC+, both existing and future, still stand to boost non-OPEC+ market
share, shifting the supply/demand balance away from the cartel.
In consequence, Saudi Arabia looks to have no choice but to extend
its voluntary cut of 1mbpd, which is due to expire next month, through
at least the first half of 2024; similarly Russia. Furthermore, Bjarne
Schieldrop, chief commodities analyst at SEB Research, quoted in a 16
November FT article, reckoned that “…Saudi Arabia will demand Kuwait, Iraq and the UAE chip in additional cuts, and that will be a painful discussion.”
I agree. However, I think the UAE will push back for two reasons. First, Abu Dhabi’s long-running dispute with Riyadh over its baseline
(the basis upon which its OPEC quota is calculated) has never been
properly resolved despite a modest increase earlier this year. Second,
as David Sheppard argued in a 17 November article in the FT, especially when it is about to host COP28 the UAE is mindful of its “growing role on the global stage” and keen to portray itself as a responsible player.
As for a possible threat by Riyadh to undercut the entire market by
boosting its output, I doubt this would carry the day. Indeed, rather
than dragging partners into line it could cause a break-up of OPEC, as I
laid out in the 11 July Newsletter.
One obvious counterweight to this (also pinpointed by Mr Sheppard) is
the possibility that, driven primarily by concern over possible
domestic unrest, Gulf states in particular may feel obliged to agree to a
cut in output as a gesture of solidarity with the Palestinians.
However, I am not personally persuaded that this is likely to weigh
heavily relative to economic considerations, including concern over a
possible long term loss in market share to non-OPEC producers.
I think more potent is the fact that, although the IEA is forecasting
that demand in 2024 will reach a record 102.9mbpd, surplus supply
throughout the year looks to be a distinct possibility, especially if global economic growth slows further as the IMF, inter alia, is forecasting.
All this being said, for now at least my expectation is that — aside
from extending existing cuts, be they voluntary or otherwise — any
further trimming of output will be no more than minimal.