Even after OPEC+ extended its steep production cuts until the end of March, it is expected that oil will still be abundantly available on the market next year.
In order to maintain the market balance, the Organization of Petroleum Exporting Countries (OPEC) and its allies have decided to postpone the planned increase of oil production for three months until the end of the month of March.
In the absence of a strong demand, there have been increasing concerns about an oversupply on the oil market in 2013.
OPEC had planned to reverse some of the steep voluntary production reductions and increase oil output from January by 180,000 barrels a day.
Due to the poor demand of China, the crude oil price has remained within a narrow band between $70 and $80 per barrel throughout most of 2024.
China’s crude imports stopped increasing in recent months. During the majority of this year, imports were lower than last year. The main reason for this is the slowing economy in China and the shift to electric cars.
The cartel had no choice but to continue its production cuts, as non-OPEC supply of oil was on the rise.
Barbara Lambrecht said that the reaction from oil market participants had been moderate, as it was in line with what was expected.
Steep production cuts
OPEC and allies agreed to extend voluntary production cuts of 2.2 millions barrels per day until the end of March. These cuts were due to expire December 31.
The cartel will slowly unwind voluntary production cuts starting in April. The production will increase by 140,00 barrels per day starting in April.
The total production reductions include 2 million barrels of barrels per a day from the OPEC+ group as a whole and 1,65 million barrels of barrels per da by eight members.
Since the beginning of 2024, the same eight members have also been cutting 2.2 million barrels of oil per day.
The first two reductions of 2 million and 1.65 millions barrels per days were extended for an additional year until the end of 2026.
It was expected that the production increase would be delayed by three more months.
Lambrecht said:
It was a bit of a shock to learn that the reversal in the voluntary production cut of 2.2 millions barrels per day, planned for April, will take longer than originally thought.
She said that OPEC believes that it has limited room to increase production.
Market balance
Lambrecht stated that “even with Thursday’s decisions, it is likely the oil market will be oversupplied in 2019 because global demand for oil is expected to grow less than supply outside OPEC+.”
Warren Patterson, head commodities strategy for ING Group, stated that the actions taken by OPEC+ “eat quite heavily” into projected surpluses for 2025.
Patterson wrote in a letter that “the extension of the barrels and the slower return are not enough to push next year’s market into deficit.”
The move leaves the market with a surplus in the 1H25. However, the surplus is manageable, at 500k b/d compared to the 1m b/d previously expected.
The International Energy Agency predicts that global oil demand will grow below 1 million barrels a day in the next year and even lower than in 2024.
The IEA stated that the oil production of non-OPEC nations is expected to increase by 1.5 million barrels a day in 2025. This will be enough to outpace the entire growth in demand.
It is difficult for OPEC even to raise production gradually after March.
According to ING Group calculations, oil markets will balance in the third quarter 2025 before returning to a surplus of 1,000,000 barrels per day during the final quarter.
Patterson said that “while the actions taken by OPEC+ could potentially provide a greater floor for the market than was previously anticipated, the group will ultimately have to accept lower pricing.”
Oil price forecast
The oil price fell Friday despite the fact that OPEC has agreed to delay its production increases for three months.
Experts believe that the delay in raising output and the extension of production cuts have been perceived by many as a poor demand in general, which has impacted sentiments.
Patterson stated that “OPEC+ is facing the issue of increasing non-OPEC supplies and disappointing growth in demand, largely because of China.”
According to ING the downward pressure on Brent oil prices next year is somewhat limited due to an expectation of a smaller excess due to OPEC extending its output cuts.
ING’s original forecast had Brent prices at $69 per bar in 2025, compared to the revised projection of $71 per bar currently.
Patterson stated that “the fact that the markets will still be surplus means there is still a downside in prices, especially in 4Q25”,
This view is at risk if OPEC+ extends these cuts further, even into 2025. Also, a stricter enforcement against Iran of oil sanctions could be a threat.
Lambrecht, a Commerzbank analyst, believes that the surplus next year will “quickly disappear” if the oil supply from Iran or Venezuela is disrupted.
Lambrecht added:
We expect oil prices to increase next year because the market does not seem to have taken this risk into consideration.
The post explains: How will OPEC’s latest output cuts affect the oil market balance in 2020? This post may be updated as new information unfolds
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