Oil market surplus is likely to continue in coming months, as OPEC+ intends to further increase production in November and December.
The oil that is produced by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, according to experts, will result in a huge surplus.
The global oil markets were in turmoil on Monday, with ICE Brent experiencing a significant decline of more than 3%.
The significant decline in prices was largely attributed by new reports that OPEC+ may be considering a large increase in the oil supply.
Market Balance
The influential group of oil producing nations has reportedly considered adding 137,000 additional barrels per daily (bpd), starting November.
Assuming demand is constant, this potential increase in oil supply will naturally lead to a drop in prices.
Market participants are now anxiously awaiting the official confirmation of that decision. This is likely to happen on 5 October, the date for the next important OPEC+ Meeting.
If OPEC+ proceeds with the proposed increase in supply, this could have wide-ranging implications for energy.
Warren Patterson, ING Group’s head of commodities, stated that “our balance sheet shows clearly there is no need for additional supply.”
The market is expected to reach a surplus of large proportions in the fourth-quarter and continue in this position until 2026.
Oil companies, as well as nations that rely heavily on revenue from oil production could be faced with new challenges.
This decision is likely to have a major impact on the trajectory of oil prices in the international market and global economic growth over the next few years.
Share of the market
Since April, OPEC’s production has increased every month. The group agreed on a plan to unwind voluntary production cuts by 2.2 million barrels a day, in varying phases until September 2026.
The cartel has been increasing production in large amounts and the voluntary reductions of 2.2 millions bpd have been reverted.
Patterson stated that “as a consequence, we expect oil prices to be under considerable pressure throughout the next year.”
OPEC+ seems confident in the ability of the market to absorb an increased supply as shown by the fact that the front-end curve is still moving backwards, despite the perception that they are increasing supply in order to regain market share.
The timespreads will be under more pressure as we enter the surplus period.
Bearish sentiments are cushioned by geopolitical tensions
On Saturday, crude began to flow again from the semi-autonomous Kurdistan Region of Iraq into Turkey through a pipeline.
According to Iraq’s Oil Ministry, this is the first time that oil was transported through this route in over two years, after an interim deal that ended a previous deadlock.
The market maintained its cautious attitude in recent weeks.
The caution is a result of the need to strike a balance between two forces. First, there are supply risks due to drone strikes on Russian refineries by Ukraine, but also concerns about an oversupply, as well as sluggish demand.
The White House also unveiled a peace initiative with 20 points aimed at ending the conflict in Gaza.
The plan includes a ceasefire and an exchange of Palestinian prisoners for Israeli hostages, as well as a withdrawal of Israeli troops.
Rystad energy, in spite of the good news, expects geopolitical risks to continue rising. Oil prices will remain steady as the markets get ready for global reactions.
Volatility is likely to continue high
Jorge Leon, Rystad’s director of geopolitical analyses, wrote in an email that the peace plan was still a long way from being a reality.
Hamas must formally approve it. Even if this hurdle is overcome, the biggest challenge will be to ensure that its implementation takes place.
It is likely that the true test of a plan’s durability will be its ability to ensure compliance with all parties, and implement effective enforcement mechanisms.
Leon stated that “in the interim, the volatility in the area is not likely to abate in the near term.”
The oil markets are still influenced by geopolitical risks, with traders expecting a possible setback or escalation in tensions.
Leon stated that the market sentiment will be characterized by the interplay of cautious optimism with deeply rooted uncertainties in the future.
Arab countries seem to support the plan. Their backing is essential to the success of this process.
As new information becomes available, this post Analysis: OPEC+ will flood the market and oil prices are set to plunge could be updated.
