Press reports suggest that Saudi Arabia will start to
unwind its voluntary cuts in output from 1 December despite Brent having
broken through its US$75pb ‘floor’ [photo credit: Saudi Ministry of Commerce]
As has been the case since October 2023, events underpinning this
risk premium are the principal ‘known unknown’ in play. In the 26 April Newsletter immediately following the tit-for-tat strikes between Iran and Israel, I argued there was:
…a non-negligible probability that [Israeli] hardliners will, in
due course, pressure Israel’s prime minister into trying to neutralise
Iran’s most important source of deterrence once and for all.
By explicitly making the return of displaced residents
to northern Israel a war aim, the Israeli cabinet seemingly took a
major step in that direction last week. However, the possible timing of
any major escalation remains far from clear. Indeed, that Israel’s
crippling of Hezbollah’s communications was not followed up immediately
by a major assault has caused some experts to speculate that an
extension in the established pattern of the conflict is more likely than
a land invasion. Furthermore, even if an invasion were to materialise
it is not inevitable that Iran would get directly involved. And, even if
it were to, this would not necessarily affect the flow of oil through
the Strait of Hormuz.
This being said, in April I did acknowledge that:
Although even a major land invasion of Lebanon…would have no
direct bearing on oil supply, a shift in market sentiment consequent to a
marked escalation on Israel’s northern front could see sustained higher
prices.
However, the pattern since then has been that any politics-driven
uptick in the price of crude has quickly faded. This suggests that it
would now take a major disruption in supply to see Brent firmly back in
its US$75-85pb range, let alone any higher.
Turning to the dilemma with which OPEC+ is grappling, as Bloomberg’s commodities expert Javier Blas wrote on 5 September:
…looking at the 2025 balance of supply and demand, OPEC+ is
simply kicking the can down a very uphill road. In two months, the group
will have to take another fateful decision. If it wants higher oil
prices in 2025, it will have to do far more than delaying the almost 2
million barrels a day of extra production that it penciled in by the end
of next year. It will need to cut output outright. Without curbing
production, further price drops loom.
This is consistent with the International Energy Agency’s (IEA) latest monthly Oil Market Report, the key points in which were as follows:
- Growth in global demand for oil continued to decelerate thanks principally to sustained contraction in consumption in China;
- Growth in demand through 2024 was forecast to be below one million
barrels per day (bpd), taking total demand to an average of just short
of 103mbpd;
- Growth in demand through 2025 was forecast to be only marginally higher;
- Output globally in August averaged 103.5mbpd despite disruption in Libya, Norway and Kazakhstan; and,
- Non-OPEC+ output is set to increase by 1.5mbpd this year and by the same through 2025.
As the report concluded:
…with non-OPEC+ supply rising faster than overall demand…OPEC+
may be staring at a substantial surplus, even if its extra curbs were to
remain in place.
Bloomberg’s Blas again:
Tactically, OPEC+ is also sending the worst possible message to
the market. First, the deal speaks about the gymnastics the group is
doing to preserve unity…. Second, it's a belated admission the market
doesn't need the oil the group had anticipated…. And third, it doesn't
address the surplus of the first half of 2025, which would continue to
stoke bearish bets.
As if Mr Blas’s second point were not bad enough, the cartel’s
credibility is called further into question by the OPEC secretariat’s
insistence in its 10 September Monthly Oil Market Report (MOMR) that
global growth in demand this year would hit 2mbpd. This appears to be
based principally on continuing bullishness over economic activity in
China. However, that assessment is not shared either by the IEA or by
the investment community at large which is increasingly minded that, in
addition to sustained economic weakness, we may be seeing a structural
shift in Chinese demand for oil underpinned by the increasing number of
electric vehicles on the road and high speed rail eroding demand for air
travel.
What is clear is that it is not in OPEC+’s power to significantly
change the market dynamic other than in the — in my view, unlikely —
event that it agrees to a further sizeable and permanent cut in its
total output, not only surrendering more market share but also seriously
risking breaking up the cartel in the process. However, on 26 September
the FT
reported that, in an effort to protect its market share, Saudi Arabia
is set to begin unwinding its voluntary cuts from 1 December by a
minimum of 83,000bpd per month. Although what would amount to a major
shift in policy by Riyadh has yet to be confirmed, the immediate
downtick in the price of crude is confirmatory that, absent a major and
sustained geopolitical shock, Brent crude now looks very likely to
settle below US$70pb well into 2025.
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