The oil market is facing one of the most complex challenges since the pandemic, due to a combination of geopolitical tensions, long-term production strategies and volatile demand, particularly from China and Europe. OPEC+ decisions and uncertainties in the US are currently shaping market conditions and putting pressure on both producers and consumers.
OPEC+: strategy of production delays
OPEC+, an association of 23 oil countries, has continuously extended its voluntary production cuts since 2022. These measures were aimed at stabilizing oil prices post-pandemic slumps. In June 2024, the original plan was to gradually increase production by 2.2 million barrels per day. In the most recent decisions, the following was decided:
- The production increase has been postponed again and is now scheduled to begin in April 2025 at the earliest.
- OPEC+ originally planned to extend its current production cuts until September 2025 completely. This deadline has now been extended by one year, meaning that the cuts will not be reversed until September 2026 be completed.
- This is the third delay in 6 months.
Reasons for the delay
Weak demand:
- China is experiencing slower economic growth, which is dampening demand for oil. In the third quarter of 2024, the Chinese economy grew by 4.6%, the weakest growth in a year and a half. Economic growth of around 4.8% is expected for 2024, with a further slowdown to 4.5% in 20251. The World Bank forecasts real GDP growth of 4.5% for 2024 and 4.3% for 2025. The main reasons for the slowdown in growth are weak domestic demand and consumer restraint, the real estate crisis and uncertainty on the labor market.
- European demand also remains subdued due to the energy transition, economic uncertainties and geopolitics.
Alternative offers:
- Countries such as the USA, Brazil and Canadawhich are not part of OPEC+, are taking the opportunity to increase their own oil production in order to benefit from the higher prices resulting from the OPEC+ production cuts.
- These countries can supply the market with additional oil, which could enable them to gain market share.
Risk of excess supply:
- If these countries continue to increase their production volumes while global demand for oil may stagnate or grow more slowly, this could lead to an oversupply.
- Such an oversupply would lower the oil price again, which would undermine OPEC+'s strategic cuts.
Internal tensions in OPEC+:
- States such as the United Arab Emirates are pushing for higher production volumes, while Saudi Arabia continues to pursue a restrictive policy in order to ensure price stability.
- The UAE produced around 700,000 barrels more than agreed with OPEC+ from January to October 2024. The agreed output for the UAE was 2.91 million barrels per day, but this is excused by a waiver to increase its output by 200,000 barrels per day to 3.2 million barrels per day in 2024.
- Saudi Arabia has extended its voluntary production cuts until the end of June 2024. They reduced production by 1 million barrels per day in addition to an earlier cut of 500,000 barrels per day. Saudi production will be around 9 million barrels per day by the end of June 2024.
Reasons for the tensions:
- The UAE has invested heavily in capacity reserves and is pushing to use them. However, Saudi Arabia is aiming to support oil prices by cutting production.
Price trends and market forecasts
The Brent price is currently at $IOIL00 (+0.51%) which represents a decline of around 18% compared to the peak in July 2024. The price of US WTI oil $CRUD (-1.31%) are in a similar range.
Forecasts
- $C (+0.59%) has revised its forecast upwards and sees an optimistic scenario of 60-65 USD per barrel for the end of 2024 and the beginning of 2025.
- $JPM (+1.21%) forecasts an average Brent oil price of 84 USD per barrel for 2024. For 2025, JPMorgan expects an average price of USD 75 per barrel
- $GS (+1.09%) has revised its forecast for 2024 to an average of USD 81 per barrel for Brent oil.
Long-term prospects
The US Energy Information Administration (EIA) forecasts an average Brent price of USD 61 per barrel for 2025 and 73 USD per barrel for 2030.
Effects on the producing countries
Saudi Arabia:
- Saudi Arabia needs high oil prices to balance its budget. According to forecasts, the threshold is currently around 96 USD per barrelwell above current market prices. This dependency is particularly evident in megaprojects such as Neom City and the Vision 2030which are dependent on stable income. In addition, the organization of events such as the Soccer World Cup 2034 and the Expo 2030 massive budgetary resources.
- Despite these conditions, there are signs of a possible change in strategy. Saudi Arabia could abandon its previous target of an oil price of 100 USD per barrel in order to regain market share. However, this could mean lower oil prices, which would make it more difficult to finance projects and put additional pressure on budget stability.
Russia:
- Oil plays a central role in financing the war in Ukraine. In 2024, almost a third of the Russian state budget is to be used for military spending, which amounts to around 111 billion euros equivalent. The Kremlin is financing this high expenditure through budget reallocations and is relying heavily on oil revenues to fund the war.
- Western sanctions have affected Russian oil exports, but Russia has found ways to partially circumvent them, as I explained in another report (link in the comments). A shadow fleet of oil tankers makes it possible to continue exporting oil despite sanctions. However, revenues are no longer as high as before the sanctions, and lower oil prices could further limit Russia's financial options for the war.
- Despite the sanctions, the Russian economy has adapted faster than expected. Through more intensive trade with countries such as China and other non-Western countries, the circumvention of the G7 oil price cap and increased government spending on the military industry, Russia has been able to take countermeasures. Nevertheless, it remains vulnerable to price fluctuations on the global oil market and faces an acute labor shortage.
- The extension or tightening of Western sanctions could significantly further impact Russia's oil exports and thus revenues, which would pose new challenges to the country's economic stability.
Iran:
- Iran has significantly increased its oil exports since 2021, with an average export of 1.56 million barrels per day in the first 3 months of 2024 (the highest in 6 years). This increase of 1.2 million barrels per day since 2021 is plausible given the low level of exports at the time.
- With the election victory of Donald Trump in the 2024 US presidential elections, however, Iran is facing a possible new round of sanctions. Trump is planning a return to the "maximum pressure" strategy that drastically reduced Iran's exports from 2.5 million to just 350,000 barrels per day within 2 years during his previous term.
- The reintroduction of such sanctions could have a significant impact on the global oil market. Especially China's China's role is crucial here, as it absorbed more than 85% of Iran's oil exports this year. At the same time, Iran has improved its mechanisms for circumventing sanctions, which could reduce the effectiveness of new measures. Overall, renewed sanctions could destabilize the oil market, but the exact extent remains difficult to predict as Iran has significantly increased its ability to maintain trade routes.
Long-term challenges and opportunities
Energy transition and decarbonization
- Europe: Promotes investment in renewable energy and reduces oil consumption.
- China: Is investing massively in electromobility, which will reduce oil demand in the long term
Technological innovations
- Countries such as the USA are focusing on technologies to increase oil extraction from shale oil deposits.
- This could reduce production costs and increase competitiveness.
Role of OPEC+ in the future
- Long-term coordination within OPEC+ is becoming more difficult as national interests increasingly diverge.
- A possible split in the alliance cannot be ruled out if countries such as the UAE and Russia assert their own interests more strongly.
