OPEC+ Policy's Impact on the Future of Oil Prices

As we approach 2024, the oil market is under scrutiny, with forecasts initially indicating an excess supply in the early part of the year. This anticipated surplus, brought on by traditionally weaker demand in the first quarter, prompted action from OPEC+, the oil-producing conglomerate, to avert a glut that could depress prices.

OPEC+, with leading players such as Saudi Arabia and Russia, has decided to extend their voluntary supply reductions through the first quarter of 2024. Several other members have also pledged additional cuts, cumulatively reducing the output by nearly 2.2 million barrels per day (MMbbls/d), although the effective reduction after accounting for various factors stands at 900,000 barrels per day (Mbbls/d).

These strategic supply cutbacks are expected to be sufficient to swing the market from a surplus to a slight deficit as the year progresses. The market is anticipated to achieve a state of relative equilibrium over the first half of 2024, but specific reforms by OPEC+ could shift this balance. Price projections for ICE Brent crude oil suggest it will trade in the low $80s at the commencement of 2024, with the second half of the year potentially seeing a return to a deficit and prices climbing, averaging around $91 per barrel.

The Role of OPEC+ Policy in Stability

OPEC+ has actively managed the oil market over the past year, led by Saudi Arabia advocating for significant production cuts. The Kingdom's budgetary thresholds are served well with oil prices above $80 per barrel, providing an incentive to keep prices propped up.

With projections indicating a deceleration in U.S. oil supply growth next year, OPEC+ gains confidence in slashing production without forfeiting market share. Despite strong U.S supply growth this year, it is foreseen to grow only modestly in 2024 due to a range of factors, including a shift towards shareholder returns and tighter fiscal controls. OPEC+ also faces trials internally, with discord over production quotas for 2024, particularly from Angola, and difficulties in aligning on group-wide reductions.

OPEC is reportedly sitting on substantial spare capacity, with estimates placing it at approximately 5.5 million barrels per day, which could increase even further with the newest production cuts. With 58% of this capacity controlled by Saudi Arabia, this surplus capacity also cushions the market against potential price spikes, potentially mitigating the need for OPEC+ to intervene.

The Variable of Sanctions

Sanctions inject a note of unpredictability into oil supply estimations for the coming year. The geopolitical situation with Iran and Venezuela, and the U.S. enforcement of a G-7 price cap on Russian oil, could all affect available supply. Despite the sanctions, Iran has upped its output in 2023, while Venezuela has seen eased restrictions in hopes of fair elections. However, both countries face the risk of harsher sanctions, potentially affecting over 700,000 barrels per day of supply. Additionally, U.S. measures against companies breaching the price cap on Russian oil could impede the transportation of Russian crude in Western markets, although Russia has been developing its tanker fleet to circumvent these barriers.

U.S. Supply Dynamics

The United States experienced unexpected growth in oil supply in 2023 but anticipates a slower increase in 2024. A combination of economic factors is leading to a cautious expansion of drilling activities, pointing towards a moderate growth in U.S. oil production next year.

A Global Slowdown in Demand Growth

Oil demand projections for 2024 are rife with uncertainty largely due to the ambiguous economic outlook. International oil demand is still on track for growth, albeit at a rate of about 1 million barrels per day, a downturn from the growth witnessed this year. China is projected to be the driving force behind this growth, accounting for over 60% of the increase, while Europe and the Americas might experience reduced demand as economic growth stalls.

OPEC, Supply, Demand