“Oil Prices Would Drop Into the $60s If OPEC+ Follows Through on Adding Barrels in 2025!”

Dr. Jeff Brown , President, FGE

The focus in the market today is mainly on demand concerns, not potential geopolitical supply disruptions. Oil demand is growing by around 1.2 million b/d this year and next, but non-OPEC supply is increasing as well, by about 2 million b/d this year and 1.6 million b/d in 2025. Beyond crude, there’s also biofuels and NGLs growth. China’s oil demand growth coming out of COVID in 2023 was around 1.6 million b/d. This year, it’s just under 200,000 b/d. Part of this slowdown is a slowing economy and housing sector issues. And while there’s some optimism for 2025 with potentially more stimulus, there are also two fundamental structural shifts in China. One is the uptake of EVs, which hasn’t impacted total oil demand yet, but has knocked out about 150,000 b/d of gasoline demand growth that we would have otherwise seen this year. The second factor is increased LNG use in trucking, which has removed another 150,000 b/d of demand growth. We don’t see the EV issue changing anytime soon, though the LNG trucking scenario could change depending on what happens to gas prices in China. So, looking ahead to next year, if OPEC+ follows through on its planned additions, prices could drop, certainly into the $60s and potentially even down to the $50s. However, there’s also the issue of compliance; several countries, like Iraq, have been overproducing. In September alone, non-compliant members overproduced by 600,000 b/d. And if they were to fulfil the compensation they’ve been pledging, that would be another 700,000 b/d. If OPEC+ could somehow enforce compliance, it could free up room to bring in new barrels.

How would a Trump or Harris US election win, impact energy policy?

Betting markets are starting to factor in a potential Trump return, which some see as more inflationary. He might lift the pause on new US LNG projects, potentially impacting global gas markets a few years ahead. We would not expect to see much more positive impact on US oil; production grew by 2.8 million b/d under Biden. In terms of sanctions on Iran, though we estimate he would reimpose them, it would only reduce market supply by a few hundred thousand barrels per day. Trump is also known for tariffs, which could have a dampening effect on trade. During his previous administration, we estimate that the ‘trade war’ led to loss of 250,000 b/d of oil demand.

Isn’t the consolidation in the US oil patch expected to deliver more output?

The US is the most price-driven part of the market, so if prices decline, that can certainly weigh on output over the short-term. The picture ahead shows that US production growth will likely slow down and plateau over the next couple of years, but we will still see growth in NGLs. Gas is taking an increasingly significant role, and crude is becoming more NGL-oriented.

Future direction for global refining?

Most of the capacity additions are happening in emerging markets where demand growth is strongest. Europe is feeling pressure from all sides - high gas prices, weak demand, and increasing carbon costs, so we’ll continue to see refinery closures in Europe, and likely also in coastal parts of the US and in some regions in Asia, like Japan. What’s interesting in refining is that while we’re seeing new capacity now, there’s nothing planned beyond 2026. So, after we go through this wave of closures, we expect refinery margins could be strong in the late 2020s, simply because we’ll lack new capacity.

Potential ‘Black Swan’ events for 2025?

If peace were somehow achieved between Russia and Ukraine, or if something led to Putin’s departure, that would have a huge impact on gas markets and drive significant price shifts. Another semi-Black Swan scenario might include a major economic collapse in China, which is not currently priced in. Lastly, we always face the possibility of supply disruptions; however unlikely, those could always come along and bite us.

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Over the last week, Gulf Intelligence has held high-level interviews with energy experts in the Middle East, Asia, Europe, and the US. This intel is harvested from the exclusive briefings.

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Laury Haytayan   
MENA Director, Natural Resource Governance Institute        

No one expects this controlled conflict between Israel and Iran to go beyond what we’ve seen already.

Geopolitical risk has gone from the oil market in terms of any chance of a serious escalation on that front. People are now waiting to see the direction of the new US administration and any upcoming ceasefire initiatives. Post-ceasefire, we’ll need to consider the practicality of reconstruction in Gaza and Lebanon. There’s the ongoing concern that Israel may limit that given their belief that many of these areas are militarized with tunnels.

Will the current oil price alter OPEC+ plans to increase supply in December?

For those who believe in balancing the oil industry with Energy Transition goals, these lower prices could be an encouraging signal to accelerate change. For example, Saudi Arabia has indicated it will prioritize domestic investment, channeling funds internally to diversify its economy - a move that speaks to their economic vision, oil demand expectations, and price forecasts. Meanwhile, countries like Iraq, with fewer resources to invest, may find lower prices a necessary impetus to reform and improve economic spending efficiency. So, for OPEC+ countries, it may be better to acknowledge the ongoing transition rather than clinging to signs suggesting it won’t happen. The differing capabilities among countries - some able to invest heavily, others not -only highlight the urgency for action.

US election result impact on the Mideast region?

There’s an interesting dynamic among Arab-American voters, with some supporting Trump, citing his promise of peace in the region. Meanwhile, Democrats face challenges, especially regarding their stance on Gaza and Lebanon. In the Middle East, opinions are similarly split. For Iran, a Trump administration would be undesirable. During his previous term, the US withdrew from the JCPOA, imposed further sanctions, and significantly impacted Iran’s military and proxies in Lebanon, Gaza, and beyond. For Iran, a Harris win would likely be preferable, as the current administration has shown a level of protection for Iran against Israel, for various reasons. This division is mirrored across the region: allies of Iran support Harris, while opponents lean toward Trump.

Viktor Katona 
Head of Oil Analysis, KPLER        

Next year could be a year of reinvention for NOCs like Saudi Aramco.

It will be a period of low refining margins, with refiners less able or willing to buy as much crude. We’re already seeing a shift by state-owned Chinese refiners toward spot markets rather than term contracts with Middle Eastern suppliers, which reflects slowing demand, and also that buyers are scrutinizing every penny to stay profitable. Saudi Aramco can still do well in this environment, but it must adapt.

Is the market currently in balance?

Yes, but with the caveat that OPEC+ does not increase supply. At present, anticipated demand growth for next year is roughly equal to non-OPEC supply. Any additional OPEC+ production would likely depress prices. The market seems divided on whether OPEC+ will proceed to bring back production in December. If the expected increase does not materialize, the December Brent contract, especially in the first week, will see an immediate price up tick; those betting on additional supply would be caught off guard. So, we should expect potential volatility in early December.

How relevant are oil inventories levels in this market?

They don’t have a substantial impact on long-term pricing in real terms. If we look at the US, the SPR has been drawn down to levels not seen in 40 years, yet the price impact has been minimal. The Department of Energy has essentially run out of funds, meaning this is likely the last SPR replenishment we’ll see under the Biden administration, and what will happen after that is uncertain. There’s also a key distinction between types of inventories. The most depleted inventories are government-controlled SPRs. With a consensus that the global economy will consume less crude in future, governments may not need to rebuild these strategic stocks. After the supply disruptions of 2022, several OECD and G7 countries released stocks, but most have not replenished them. The second type are commercial inventories - those held by refineries, ports, and pipelines – and these are essentially at 2021 levels. So, there’s some risk there, but it seems the market has moved on from speculating about it.

Imad Al-Khayyat 
Research Lead, London Stock Exchange Group 
Former Chief Economic Analyst of OPEC        

Oil Prices Deprived of War Premium!

Middle East Geopolitics

Oil traders may now have an answer to the biggest question in Middle Eastern geopolitics. It appears the region is set to experience an unofficial truce between Iran and Israel, potentially lasting for many months. This truce might only prevent direct exchanges of attacks between the two. Consequently, oil prices will have to move without the influence of geopolitical tensions. Therefore, exceptional upward spikes in prices are less likely this week.

Oil Inventories

An underlying bullish element in oil prices is that various market estimations of global oil stocks do not indicate a noticeable buildup compared to last year. While this may not cause oil prices to surge, it could provide a floor when needed. The oil market has navigated the maintenance season, softened demand from China, and a slight increase in supply from the US without accumulating stocks in a way that would pressure prices for months to come.

China oil demand

The short-term trajectory of China’s economy and oil demand will continue to cause significant differences in 2025 forecasts. Even after considering the recently announced monetary and fiscal stimulus, raising China’s oil demand expectations for 2024 seems unrealistic. Doing so for 2025 at this stage also appears premature and speculative.

OPEC+

The actual global oil supply as of December 1, 2024, could change depending on whether OPEC+ sticks to its decision to roll back some of its voluntary cuts in monthly increments. While the physical impact may not be significant in the first couple of months, the sentiment it creates will be hard to overlook. Reasonable levels of global oil stocks, seen above as a floor-setter for oil prices, could also encourage OPEC+ to test the waters and release somewhat more oil for a couple of months into 2025. Even if large share of the added barrels go into stocks, it might not be too much of a burden for the oil market to absorb during next summer’s seasonal demand. However, this is likely to lower the floor under prices.

Omar Najia 
Global Head, Derivatives, BB Energy        

I expect asset prices to rise as we approach November 5th, with further increases if Trump is elected.

Oil prices will likely drop and when it becomes an obvious buy, we might see a surge of speculative money moving in. We could see oil falling to around $50. Trump would also potentially increase government spending, leading to a devaluation of the USD and, consequently, a rise in the value of real assets like precious metals, real estate, equities, and even Bitcoin. The USD will weaken whether Trump or Harris wins, because of budget deficits and debt levels. Equity markets are seeing strong inflows, indicating investor expectations of continued dollar devaluation. It’s just a matter of realizing that the dollar and other fiat currencies will continue to lose value against real assets. This drives investors to buy tangible assets like equities. The S&P could reach 6000 or above by the end of this year, with a further rise to 8000 in the next year. We are in a new dynamic. The US has ramped up spending since Covid, and that hasn’t slowed. The Fed has acknowledged that this is unsustainable, and its interest rate adjustments reflect its struggle to manage the high interest payments on its borrowings. Noone is buying long-term US treasuries. That shows the lack of confidence in the USD because buying long-term means your return loses value over time, as inflation and asset prices continue rising.

Frank Kane 	             
Editor-at-Large, Arabian Gulf Business Insight        

Low production volumes and lower prices have impacted the Saudi economy.

Technically, it was in recession in 2023, though it is expected to rebound this year. The decision by the kingdom to reduce the proportion of international investment in its Public Investment Fund (PIF) proportionally to domestic investment, marks a notable shift to prioritize the funding of projects in the country. The PIF is growing quickly, nearing the trillion-dollar mark, and international investments are still increasing in absolute terms, but the focus on domestic projects is clear, with several high-cost ventures like Expo 2030 and the World Cup in 2034 needing completion. These multibillion-dollar events weren’t anticipated when Vision 2030 was initially developed, and unlike Vision 2030, which has some flexibility, these events have fixed deadlines.

What was your main takeaway from the FII summit in Riyadh this week?

A poll put to the delegates showed that 67% believe Trump will win the US election and the majority view was also that this would be beneficial for US-Saudi relations and American business. However, there was uncertainty as to whether that would be positive or not for oil markets. The key message I took away on Saudi oil policy was that it will continue producing oil with a focus on monetizing every last barrel.

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