If Saudi Arabia imposes another output cap during the OPEC+ meeting next Sunday, it will have an immediate impact on prices while also significantly reducing the Kingdom’s overall market share, according to sector experts.
The producers of the 23-member OPEC+ group, led by Saudi Arabia and Russia, will convene for a full ministerial conference on Sunday in Vienna to review market conditions and decide on their production policy for the year ahead.
During the meeting, Saudi Arabia is expected to be confronted with the most frequently asked question: whether the Kingdom will continue the additional production cut of 1 million barrels per day (bpd), which it has been voluntarily implementing since July.
– More balanced market is expected in 2024
While OPEC+-producing countries assert that they set output limits to establish market equilibrium, supply curbs also seek to maintain oil prices at a predetermined baseline, protecting these nations’ oil-related revenue.
Oil prices plummeted to their lowest levels in four months last week due to sluggish demand and persistent oversupply fears. WTI crude oil prices fell to $72.11, while Brent crude oil prices fell to $76.60 a barrel.
According to the International Energy Agency’s latest oil market report, global oil demand is expected to reach an average of 101.5 million bpd in the first quarter of next year. Over the same period, global oil supply is predicted to reach 102.8 million bpd on average, based on the current OPEC+ agreement. This represents a surplus of approximately 1.3 million bpd despite production cuts.
The report estimates that demand for the entire year 2024 will be 102.9 million bpd, and supply will hit 103.4 million bpd. It also predicts that excess supply will gradually decrease in the second and third quarters and that supply will lag slightly behind demand in the last quarter. Thus, an average daily surplus of 500,000 barrels is anticipated for the upcoming year.
According to OPEC’s monthly oil market report released earlier in November, global oil demand is estimated to be 103.6 million bpd in the first quarter of next year. The same report estimated that global oil supply for October amounts to 101.6 million bpd.
According to independent research company Rystad Energy, if Saudi voluntary cuts are not extended into 2024, an increase in supply in the first quarter of next year is expected with balanced markets.
In the second quarter of 2024, though, a looming market supply surplus of over 600,000 bpd will be in sight.
The agency reported that the markets would be fairly balanced next year compared to the significant supply deficit of 1.2 million bpd in 2023.
– Sluggish oil prices could be indicator of outcome at OPEC meeting
Rystad Energy’s Senior Vice President Jorge Leon said the markets will be eagerly awaiting the OPEC+ meeting on Sunday in anticipation of what Saudi Arabia decides over its voluntary crude oil production cuts of 1 million bpd in place since July.
“Regardless of the path they take, Saudi Arabia’s decision on the production cuts will ultimately shape the short-term future of global oil prices,” Leon said, stressing that the kingdom is also balancing the desire to keep prices high by limiting supply with the knowledge that suppressed supply will lead to a further drop in overall market share.
Crude prices have experienced significant downward pressure in recent weeks, with prices falling below $80 per barrel last week after a dramatic sell-off driven by oversupply concerns.
With the recent nosedive in oil prices, Leon said these price declines “could be an indicator of what’s to come at the OPEC meeting, as the Saudis have repeatedly demonstrated that their price floor is above $80 per barrel.”
Leon recalled that Saudi Arabia announced its voluntary cuts on the sidelines of the OPEC+ meeting, which were initially a 1 million-bpd output cut for July and then extended on a monthly basis into August and September, and finally rolled over until the end of this year.
‘Oil markets will be looking to see if Saudi Arabia extends these cuts into 2024 or if it chooses to gradually unwind them or simply let them expire at the end of this year,’ Leon said.
‘Whichever way it goes, Saudi Arabia’s decision will have significant implications for oil markets and, in particular, for the oil price next year,’ he added.
– Possible scenarios and their impact on 2024 oil prices
Rystad Energy has run five different scenarios on possible decisions about Saudi Arabia’s production policy and their effects on oil prices.
‘In the scenario where Saudi Arabia does not extend voluntary cuts, market bearishness will extend, with oil prices averaging slightly above $80 per barrel next year,’ Leon said.
If Saudi Arabia extends voluntary cuts until April 2024 and then gradually unwinds them, Leon predicts that oil prices will average $96 per barrel in 2024.
He predicts that oil prices will see $84 a barrel if Saudi Arabia unwinds the voluntary cuts very rapidly ‘so that by April 2024 they are fully unwound.’
He added that prices will average $87 a barrel in the scenario in which Saudi Arabia unwinds voluntary cuts gradually until June 2024.
However, if Saudi Arabia extends the 1 million-bpd voluntary cuts into January and February next year and then very gradually unwinds them until July 2024, Leon said oil prices can even see $92 a barrel.
Based on the International Money Fund’s (IMF) statement that Saudi Arabia’s oil breakeven price is $86 per barrel, Leon said ‘Saudis will need to keep giving away market share, at least until June 2024, to achieve that price level.’
