from Warren Patterson
Tightening of the oil market in the second half of next year
Heading into 2024, the market has been concerned about a looming surplus in the first quarter of next year, driven by weaker seasonal demand. However, at their last meeting, OPEC+ took action to delete this expected surplus. Saudi Arabia and Russia will end additional voluntary supply cuts by the end of Q1 24, while a handful of other members have announced their own additional voluntary supply cuts. In total, these cuts amount to just under 2.2 MMbbls/d. However, the amount currently included in the additional new cuts is 900 Mbbls/d.
These supply cuts should be enough to remove the glut in 1Q24 and, in effect, leave the market in a small deficit early next year. However, our balance sheet continues to show a small surplus in the second quarter of the year, which means that the market is mostly balanced during the first quarter of the 24th. This can and will likely change depending on how OPEC+ members resolve these voluntary cuts.
Given that balanced market, we expect ICE Brent to continue trading in the low $80s early next year.
The second half of 2024 will see the market return to deficit, which suggests we see prices rise in 2H24. We forecast Brent to average US$91/bbl over the last six months of 2024.
Global oil balance (MMbbls/d)
OPEC+ policy is key
OPEC+ has been very active over the past year in trying to support the market. Saudi Arabia has led the way in pushing for deep cuts, and this is evident with the voluntary cuts we are seeing from the Kingdom. Saudi Arabia has a fiscal breakeven oil price of just over US$80/barrel, so they are keen to ensure oil prices remain largely above this level.
The view that US supply growth is slowing has also given OPEC+ confidence in cutting supply without the risk of losing market share. While US supply growth has surprised to the upside this year, it is expected to slow significantly next year, suggesting the Saudis will remain calm by keeping supply off the market.
However, the latest OPEC+ meeting has highlighted some key issues within the group. First, some members (specifically Angola) are not happy with their production quotas for 2024 and have already said they will reject their quota level for next year. However, from a supply point of view, given the pressure we have seen on Angolan production, this is unlikely to move the needle much.
Of greater concern to OPEC+ should be the fact that they have been unable to agree on cuts across the group. Instead, we are seeing voluntary cuts by a small number of members. Clearly, given the scale of cuts we’re already seeing from the group, it’s becoming increasingly difficult for some members to take further cuts.
Also, given the scale of the cuts we’re seeing, OPEC is sitting on a significant amount of spare capacity. If we include Iran, OPEC has about 5.5 bpd of spare capacity. And this will only increase during the first quarter of 24 after the recently announced cuts. 58% of this belongs to Saudi Arabia. This spare capacity should also provide some comfort to the markets given that if we see significant pricing power, we can expect this capacity to start coming back into the market.
OPEC spare capacity (MMbbls/d)
Risk of sanctions
Sanctions leave a lot of supply risk in the market next year. And this is especially the case for Iran and Venezuela. The US also appears to be enforcing the G-7 price cap on Russian oil more strictly in recent months.
Iran has significantly increased its supply through 2023, rising from around 2.5 bpd at the start of the year to around 3.1 bpd currently. This happened despite US sanctions remaining in force against the country. The US has been concerned about the high-price environment and supply risks facing the market since Russia’s invasion of Ukraine and appears to have taken a softer stance against Iran.
However, after recent events in Israel and the possibility of Iranian involvement, there is a risk that the US will begin to enforce sanctions more strictly in the future. If that were to happen, we could see more than 500 Mbbls/day of lost supply. For now, we are assuming Iranian flows will remain at around 3.1 MMbbl/d in 2024.
As for Venezuela, the US has eased oil sanctions in exchange for fairer general elections in the country next year. However, if this does not happen, we may well see the return of these sanctions against Venezuela. The supply at risk would be about 200 Mblbs/day.
In recent months, the US Treasury has also been more active in sanctioning shipping companies that have transported Russian oil above the $60/barrel price limit. The move could put many Western shipping companies off shipping Russian oil altogether, given the risk of sanctions they face if oil prices rise above US$60 a barrel. Therefore, going into next year, it may become more challenging to transport Russian oil using Western shipping services. However, Russia has built a significant fleet of its own tankers to overcome the G-7 price cap.
Increase in supply in the US
US oil supply growth has surprised growth in 2023, with it estimated to increase by 1 bbl/d, to a record high of 12.9 bbl/d.
However, US drilling activity has slowed significantly this year, suggesting the US will see a more modest increase in supply in 2024, forecast to increase by 250 Mbbls/d to 13.15Mbbl/d. A focus on shareholder returns, cost inflation, tighter credit conditions and increased consolidation within the industry are some of the factors holding back drilling activity.
Global oil demand growth slows
There is much uncertainty over oil demand in 2024, given the uncertainty over the macro picture next year.
Global oil demand is expected to grow by about 1 bbl/d next year, which would be down from about 2 bbl/d of growth this year. It is mainly Asia, and especially China, which is expected to be behind most of the growth in demand next year. Over 60% of the increase in oil demand is expected to come from the country next year. Meanwhile, Europe and America are expected to see a slight decline in demand next year amid weaker economic growth.
Global oil demand growth-2024 (MMbbls/d)
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