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The OPEC+ plan is working but another challenging year lies ahead

Published by , Editorial Assistant
World Pipelines,

The OPEC+ plan has been working. Production cuts by Saudi Arabia and Russia have had the intended effect of tightening the global oil balance and have convinced previously bearish speculators to turn bullish. The headwind of rising interest rates, which had diminished the allure of investing in oil futures, is also easing in terms of frequency and severity of rate increases. But the game is never over.

The OPEC+ plan is working but another challenging year lies ahead

The jump in oil prices over US$90/bbl has not come without costs for OPEC+. A year ago, Saudi Arabia was producing 11 million bpd. Now it is producing 9 million bpd. However, since June oil prices are up about US$20/bbl in terms of monthly average prices. But their work is not over.

OPEC+ leaders need to remain committed to supply restraint – and keep output near current levels over the next year – to keep oil inventories generally low and prices high. Keep in mind that OPEC+ supply restraint is a necessary condition but not unilaterally sufficient. There may be times when more cuts are needed if the goal is to support prices above US$80/bbl.

Measuring the OPEC+ challenge

The difficulty or ease that OPEC+ faces in terms of supporting the oil market is shaped by two variables: world oil demand growth and the change in oil production outside of OPEC+.

Conditions are most suitable for OPEC+ when demand growth is stronger than supply growth outside of OPEC+. This was most clearly demonstrated in 2021. By 2023, however, the picture changed as production gains outside of OPEC+ exceeded demand growth. This meant OPEC+ had to cut production to prevent rising oil inventories and reverse a 12 month decline in oil prices that occurred from June 2022 to June 2023.

On this point OPEC+ has succeeded. But the global supply deficit will shrink each month from September to December. This means the highest prices for this year are in September or October.

“Continued OPEC+ supply restraint is a necessary condition to meet the group’s market objectives, but it is not the only condition. Outside factors – namely world oil demand growth and the pace of non-OPEC+ production growth – will heavily influence the relative difficulty or ease that OPEC+ has supporting the oil market in the coming year.”, says Jim Burkhard, Vice President and Head of Research for Oil Markets, Energy and Mobility, S&P Global Commodity Insights.

The challenge endures in 2024

The challenge will not ease for OPEC+ in 2024. Existing cuts, including the unilateral cuts by Saudi Arabia and Russia, will have to endure if their goal is to maintain a tight market. And they will need to remain open to additional cuts because supply growth outside of OPEC+ in 2024 will exceed world demand growth, again.

For 2024 S&P Global Commodity Insights expects:

  • World oil demand (liquids) growth of 1.6 million bpd, of which 1.1 million bpd is for refined products.
  • Liquids production growth outside of OPEC+ of 2 million bpd, of which 1.5 million bpd is crude oil and condensate.

The problem is not demand growth

The OPEC+ challenge is not about demand growth, although after 2024 that may change. Largely due to the impact of China’s re-opening and ongoing normalisation of jet fuel demand, world oil (total liquids) demand growth of 2.1 and 1.6 million bpd in 2023 and 2024, respectively, is stronger than economic growth alone would support. These demand gains are at or above the typical annual gain of 1.6 million bpd from 2010 to 2019.

“Whichever way you slice it, 2024 will be no easier than 2023 for OPEC+. It could be even more difficult given that large production cuts are already in place. Continued growth in non-OPEC+ supply – not just from the US – will be the primary challenge for OPEC+ going forward.”, says Jim Burkhard.

It’s not just a US supply growth story

Oil supply growth in the US is one of the defining features of the past 15 years in energy markets. And that is the case this year as total US liquids production will average 21.6 million bpd –about 20% of world liquids supply (combined Russian and Saudi liquids production is 22.9 million bpd this year). Included in the US total liquids number is 1 million bpd of crude and condensate growth. By the end of this year US crude and condensate output will hit an all-time high of 13.2 million bpd.

But the story changes in 2024. The US will not be the largest source of growth in global crude oil production. Its neighbour to the north – Canada – will take the lead with an increase of 500 000 bpd while the US grows by 400 000 bpd. To be sure, there are risks to the Canadian outlook. The timing of when the Trans Mountain pipeline expansion opens is one of them, although it did overcome a hurdle last week when a route deviation was approved. If the pipeline were to be delayed beyond 1Q24 or early 2Q24, it could lead to deeper price differentials for western Canadian crude and put more oil in storage. Wildfires are also unpredictable and have shown their ability to impact output in the past.

Latin America is also an important source of supply gains. Guyana and Brazil will lead a 400 000 bpd gain from Latin America in 2024.

In sum, OPEC+ faces another year where their production will have to decline on an annual average basis by about 500 000 bpd to support their market objectives. And even that reduction still leads to an implied 300 000 bpd total liquids surplus for the year.

Geopolitics: Potential for a game-changing Middle East deal

Geopolitics could impact, again, the oil market in a big way over the next year. The Biden Administration is attempting to orchestrate a monumental deal involving Saudi Arabia, Israel and the US.

While oil is not at the centre of the talks, it cannot be ignored. A treaty, which would have to be approved by the US Senate, faces challenges if Saudi Arabia is perceived as responsible for raising gasoline prices for Americans. On the other hand, it could loosen supply restraint in time for the November 2024 US presidential election.

Saudi Arabia is not the only Gulf country where the Biden Administration has been active on the diplomatic front. The increase in Iranian oil production will be sustained due to the thaw in US – Iranian relations and the Biden Administration’s desire for more oil to be on the global market. Evidence is the breakthrough on 18 September that saw ten prisoners exchanged between the US and Iran and the unfreezing of US$6 billion of Iranian cash. But the rapprochement is fragile.

On the Russian front, S&P Global Commodity Insights expects that sanctions will not hinder the flow of Russian oil to the world market. If Russian oil will be hindered on its path to the global market, it will be the Russian government that decides – as it did in September with a temporary ban on exports of diesel and gasoline.

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