“OPEC+ Meeting Fails to Stop Two-month Decline in Oil Prices!”

Jorge Montepeque, Managing Director – Benchmarks, Onyx Capital Group

Market reaction was very muted after OPEC+ announced its plans for future production volumes. Prices were up and then trading mostly sideways, so in effect no change. If you’re a policy maker and you make a significant decision and have been trying to cobble a new agreement together and the market does not react, you could say the meeting was a success, because you didn’t disturb the market. If the idea was to create an upside in the price, which was not the intention this time I believe, then the meeting was a failure. If some people were thinking that the market was going to collapse, they were also disappointed. From an analytical perspective, it’s bearish because new oil supply is expected to come in. At the same time, some OPEC+ members, like Iraq, have been over producing. And in Russia, we’ve observed the fantastic results that Rosneft had for Q1, which to a large degree was caused by overproduction. There’s also the discussion about the UAE getting permission to produce an additional 300,000 barrels a day, but according to people I speak to, it has apparently been over producing already, blending condensates into crude to increase the number of cargoes available per month. So, maybe the market reaction was limited because there was already overproduction. What will be important to watch now, is how Saudi Arabia starts bringing back volumes in Q4 this year and into Q1 2025.

Outlook for global oil demand?

Demand for hydrocarbons in the global south continues to grow steadily, likely in the upper single to low double digits. However, it’s crucial to acknowledge the potential rise in supply from the US and Guyana, along with many other profitable projects that are viable at $80 a barrel. This suggests the potential for new supply will match the pace of increasing demand. Extrapolating five years into the future, there’s a compelling argument that new supply may not keep up with demand growth. Meanwhile, despite an available surplus of roughly three million barrels from OPEC+, the price remains around $80, which appears favourable for its members and other suppliers.

Could China save the day with any immediate demand recovery?

Expectations for a strong demand boost from China in the first half of 2024 were high, with significant GDP growth anticipated. However, GDP performance, especially in terms of real estate sector recovery and industrial demand, has been disappointing. We must also not overlook the incremental technological changes occurring daily, particularly the expected increase in demand for EVs or hybrids, which may gradually reduce traditional hydrocarbon demand. Meanwhile, India is becoming an example of a country that wants to grow and doesn’t have too many economic constraints by its central government.

Any signs yet that the US economy is slowing down?

Signs of a slowdown in the second half of the year are emerging. Overuse of central banking power and money creation during the Covid years led to subsequent inflation in 2022 and 2023. Another factor that has boosted the perception of inflation was the more recent rise in oil prices, which has now been capped. It is reasonable to expect a stabilization of interest rates in the US and possibly a minor cut. However, the US still needs to address its debt issue and may face challenges in selling more treasuries to do so, especially considering reluctance from countries like China.

Is there an obvious winner or loser in the US-China trade dispute?

Isolationism appears to benefit the winner, while the global consumer is the inevitable loser. The optimization achieved through globalization is being compromised as politicians prioritize local interests, adversely affecting consumers worldwide. On the matter of Electric Vehicles specifically, as the new regime of EVs and new tariffs from China are put in place, the loser will be the US consumer, and ultimately also US industry as it removes healthy competition.

How could consolidation in US oil and gas impact production?

US M&A activity may prompt regulatory concerns, particularly regarding consolidation at the top end. However, mergers at lower levels, particularly among shale producers, are expected to continue without significantly altering overall supply prospects. Price remains the primary determinant for US production efforts, with higher prices incentivizing shale oil production. If we have a price of $80, there will be more effort, and vice versa at $50 or below.

Do you see the trend line for gas prices strengthening from here?

Market dynamics in gas have undergone a reset, triggered by events such as the gas line disruption in Europe and concerns over Russian gas availability. Consequently, there has been a significant rerouting of resources, leading to a noticeable drop in prices. Globally, the supply of gas has seen an increase, and this will continue on an upward trajectory. Another factor influencing gas prices is the growth in alternative energy sources. Many countries, particularly in Europe, now derive at least a third of their electricity from renewable sources, directly impacting gas consumption. Over the past three decades, there has been a transition from fuel oil to gas as the primary source for electricity generation, and now, renewables are increasingly becoming the predominant choice. This shift inevitably leads to a decline in the consumption of the previous energy sources, contributing to the current behaviour of gas prices.

Has the geopolitical risk premium been completely removed from the oil price?

Previous concerns on security of supply in the Gulf have dissipated, and the only outcome has been the rerouting of oil flows, which adds $1-$2 in freight cost. Any war premium has essentially gone away. As for the future trajectory of oil prices, we need to think in terms of the nominal price and the real price. Because of inflationary money printing efforts in the US, it is inevitable that the nominal oil price will rise, but oil will fall on a real price basis.

Watch full Interview here!

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.

ENERGY MARKETS VIEWS YOU CAN USE

Pamela Munger
Senior Market Analyst, Vortexa        

What are shipping indicators telling us about China crude demand?

From our combined onshore inventories and seaborne imports data, we can create what we call implied refinery runs, which gives us a good idea of what’s happening in China before it happens. We’ve noticed very poor crude demand for refinery processing, which has resulted in run cuts and lower margins. They don’t have much of an export market, so their stocks are building. Additionally, at sea, you see very high oil product levels. Russia is having trouble finding homes for its barrels after newer, stricter sanctions on financial institutions, ports, and specific vessels. So, there’s a big buildup of oil products at sea, and it’s taking additional time to move around the Cape of Good Hope for Middle Eastern clean products as well.

How full is onshore oil storage in China?

Those crude inventories are reaching similar levels to last year, which is above the seasonal range and above the three-year average. Stocks are building, at a time when refineries are supposed to be coming off maintenance and returning online. You would expect inventories to be drawing down, not building. In Shangdong, onshore crude inventories are well above the seasonal range for this last year and those refineries are performing even more poorly than the main ones.

Are lower oil prices reflecting themselves at all in tanker rates?

The freight market has had a very strong year so far, with the added ton miles. By contrast, the dirty market is experiencing a slight downturn. We’ve seen Aframaxes lose out to Suezmaxes for several reasons, showing some dynamic shifts. An increase in possible crude exports out of the Middle East could buoy VLCC rates. If we see the TMX expansion out of Vancouver heating up, most of those Aframaxes headed to Vancouver will likely end up going into the PAD 5 refining system. However, it does mean more crude on the water, so that’s something to look out for. Additionally, we’re seeing some LR2s switching from carrying dirty to clean cargo, which incurs costs. This is a significant signal for the freight markets.

Mike Muller
Head, Vitol Asia        

Crude is currently well-supplied in the Atlantic basin.

Whether current surpluses are temporary or not remains to be seen but one indicator is the movement of US exports and West African oil to Asia, and that pull has been slower, raising the question of whether there will be a catch-up or not in coming months. While China’s manufacturing sector has shown positive growth indicators for several months, predicting energy demand growth remains challenging. Chinese refiners are considering run cuts due to adequate onshore inventories. Margins, particularly gasoline cracks, are at multi-year lows, excluding the COVID period 2020-2021. By contrast in India, the outlook for demand remains robust, driven by record temperatures increasing air conditioning usage and straining power grids.

Can the market absorb the additional 1.5mn b/d of products coming from Mideast refiners this year?

Demand growth globally is up by at least that much, so the market needs that capacity. It is bullish shipping because the extra product from the Middle East must find its way to markets further afield. Clean freight rates are high, but dirty freight rates less so, incentivizing ships to clean up to transport the cleaner products from the Middle East to the Atlantic basin.

Why has the oil price dropped from the $90s over the last six to eight weeks?

When oil prices rose into the $90s, there were significant geopolitical concerns, particularly concerning the Israel-Hamas conflict in Gaza and its potential wider ramifications. But the only real impact has been ships having to reroute around the southern tip of Africa, so that is what has contributed to the price decline, in addition to downward revisions in demand for the year, albeit from a very high base originally. Still, we have the US driving season ahead, forecasted to be robust, and potentially the highest ever use of jet fuel as we enter the Northern Hemisphere holiday season.

Christof Rühl
Senior Research Scholar, Center on Global Energy Policy
Columbia University        

The interplay between macroeconomic factors and oil is intriguing.

Over the last month, oil market analysts have closely followed macroeconomic indicators, especially interest rate expectations. Typically, oil demand and prices are driven by economic growth. However, it’s also insightful to view oil demand as an indicator of economic health, especially given the frequent macro data revisions in the US. Currently, we see crude oil draws, but stockpiling in distillates and gasoline, suggesting that economic activity, especially in the US, is slowing down. This slowdown means that the Fed’s interest rate policies could potentially prolong high rates, risking a recession.

What’s the long-term outlook for OPEC+ cuts?

The key to whether these cuts can be extended or maintained long-term lies with the UAE and Russia. Russia has much to gain from taking cuts more seriously, but its track record is less convincing compared to the UAE. The UAE, while eager to utilize more of its capacity, has always been a reliable team player within OPEC+, adhering to agreements. Additionally, countries like Kazakhstan, which benefit from others’ cuts but are not major contributors themselves, add to the complexity of this challenging dynamic.

Should OPEC+ assume that the Fed easing cycle won’t begin before 2025?

The market is still anticipating a rate cut in September. However, this might not lead to a sudden surge in economic growth. It’s possible that the peak of economic growth in the US has already passed, with stabilization occurring in China. The optimistic demand forecasts by OPEC+, were probably calculated thinking that demand would be further boosted by Fed rate cuts. However, this projection might not materialize if economic growth has already peaked.

What is Saudi’s short-term tolerance for a lower oil price?

Looking at Saudi’s financial history, they have no problem running deficits for prolonged periods. They are aware of their substantial oil reserves and have the flexibility to announce and scale down megaprojects if necessary. So, their internal budgetary policies are quite stable. Their oil policy is also driven by long-term considerations, and particularly managing the potential peak oil scenario, where the competition would be to produce oil at the lowest cost to retain market share. The Gulf countries are likely to be the ultimate winners in this contest.

Ali Al Riyami
Consultant & Former Director General of Marketing
Ministry of Energy & Minerals, Oman        

This is the first time I see such confusion in the oil market.

There are mixed feelings among traders and analysts on the advantages and disadvantages of the OPEC+ decision, and a lot of uncertainty. It’s the first time OPEC+ has publicly announced a long-term roadmap. Announcing an increase in production of 300,000 b/d for an individual country and extending the voluntary cuts for only three months sends negative signals to the market and it has resulted in a $4 drop within three days. The market will correct eventually, but if the downward trend continues for another 10-14 days, you can calculate the loss by multiplying Saudi Arabia’s production by $4.

Would it have been realistic for OPEC+ to sustain supply cuts of this scale?

I’m not against the idea of adding more oil into the market, but my concern is the timing and manner of the announcement. Countries like the UAE and Iraq have spent billions to increase their capacity, and so they do need to see returns on these investments at some point. All of us, including Oman, need to see our total production going to export since we need the revenues. I’m sure there will eventually be an exit strategy for this deal, but determining the right time and method for exiting is crucial.

So why do you think they did it all now?

I don’t really know. I was surprised, like everyone else. It’s not something we usually see from OPEC. But that was the decision, and these are the consequences. We could have gradually introduced portions of this decision to the market, not affecting prices so dramatically. The best decision would have been to announce that the group would continue cutting total production until the end of 2025, and then come October, the JMMC meeting could have said for example, that they would start gradually adding barrels into the market.

Jamie Ingram
Senior Editor, Middle East Economic Survey        

Has Saudi Arabia shifted from a price-defensive position to seeking market share?

It would be inaccurate to say they have abandoned price defense altogether. However, the decision over the weekend has clearly indicated that the current production levels are not the new normal. They are intent on reclaiming the market share they have lost over the last year or so. Since April of last year, when they first started rolling out these voluntary cuts, they have intended to bring these volumes back onto the market and have now provided an initial roadmap on how to do so. But it was also made clear after the meeting that they can pause or reverse these actions. Also, from the Saudi perspective, there is perhaps an element of this decision intended to send a message about internal cohesion, especially considering recent moves by some countries to want to tap into spare capacity. The commitment to begin increasing production from October has already caused prices to drop significantly, so the messaging could be to say, what do you think the price impact would be if they started to unleash more volumes onto the market.

How surprised was the market?

The market went into the weekend expecting OPEC+ to roll over the cuts through Q3, with the possibility of extending further until the end of the year. What the market didn’t anticipate, was the clear commitment to begin unwinding the cuts starting in October, and outlining exactly how they will align the cuts by country and by month. That level of detail is unprecedented. They are trying to offer long-term guidance, which can be argued to be good for market stability. However, it’s not beneficial for prices or revenues right now, especially as they can’t tap into the additional production until three months from now.

Would you say they will in fact press ahead with the October plans?

Expectations suggest the market may tighten somewhat in the middle of this year and Q3, potentially leading to higher prices and allowing them to start bringing some volumes back on. However, whether they will continue this through November, December, or into January, may require reconsideration. Many traders and analysts don’t see much space in the market for an influx of barrels in early 2025, let alone throughout that year, especially with the UAE’s production ramp-up scheduled to begin in January regardless.

Paul Horsnell
Head of Commodities Research
Standard Chartered Bank        

The OPEC+ meeting outcome adds much-needed transparency back into the market.

We now have a clear roadmap. Discussions on targets have been pushed to the end of next year, and the baseline issue with the UAE has been resolved. The cuts at the upper range of the voluntary tranche of 2.2 million b/d, were anticipated to return to the market gradually to avoid imbalance, but this will be a gradual increase through September next year. The additional 300,000 b/d from the UAE will not be fully realized until the end of Q3 next year. So, overall, the increase in supply is minimal, and the market may in fact demand more supply sooner. Production in the US has been flat to declining for eight months and that is unlikely to change anytime soon. We may reach a point where US supply hasn’t grown in a year, which is significant when considering longer-term trends. Market conditions will dictate when increased supply is justified, and there’s also room in the numbers for adjustments if those change.

What is the immediate outlook for demand?

The third quarter is expected to see an additional million barrels a day in global demand compared to Q2, which should be reflected in inventory levels. Additionally, when more people recognize this tightening in US supply, it could trigger the next upward movement. However, the initial shift will likely come from speculative short positions reassessing their stance, and some long positions returning to oil, especially as other commodity markets face challenges.

SOUNDINGS WEEK IN REVIEW