Will OPEC+ Opt for This Risky Strategy to Spur Future Oil Demand?

A month before OPEC+ is set to announce its decision on whether the gradual easing of the ongoing oil production cuts will start as planned in October, the market is rife with speculation about the group’s output policy.

The latest hint from OPEC+ sources that the unwinding would begin as scheduled sent oil prices plunging further below $80 per barrel on Friday. The market reacted to the possibility of more supply at a time when demand appears shaky, especially in the world’s top crude oil importer, China.

At the current level of $74 per barrel Brent as of Tuesday morning, prices seem low for most of the OPEC+ producers, which need at least $80 and even $90 oil to balance their budgets.

Weaker-than-expected demand, which even OPEC acknowledged in its monthly report in August, and oil prices below $80 per barrel would typically signal that the OPEC+ alliance may delay the beginning of the easing of the cuts.

But OPEC+ and one of its leading officials, Saudi Arabia’s Energy Minister Abdulaziz bin Salman, are famous for going for surprises in production policy, either to “burn the shorts” and make traders “ouch”, or show the market who is in charge of supply and who is proactively “stabilizing” the market.

OPEC+ Could Begin Easing Cuts

Until a few days ago, most analysts believed OPEC+ would delay the start of the unwinding of the cuts as the group faces slower demand and bearish market sentiment amid fears of slowing economies.

But reports and market speculation from recent days suggest that the OPEC+ production plan unveiled in June remains as-is: begin to add back in 180,000 barrels per day (bpd) in October.

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The cartel and its allies led by Russia could opt to boost supply even amid slack current demand in the hope of raising demand in the medium term with lower oil prices, Reuters columnist Clyde Russell argues in his column.

The key question is whether OPEC+ producers would be willing to take a “pay cut” in the short term to guarantee higher demand for their product in the medium term.

Adding more supply and depressing prices could also meddle with the plans of U.S. producers, which could slow drilling activity if prices fall closer to breakeven levels.

As the saying goes, the cure for low prices is low prices. Allowing cheaper prices of the commodity that’s essential for global economic growth, OPEC+ could hope for a demand rebound, especially in key importing nations in Asia, including China, which tend to buy and stockpile more crude when prices are lower.

Low prices could also ease inflation and prompt more central banks to begin cutting interest rates, Reuters’s Russell notes.

Weak Demand, Strong Supply Growth

Currently, global oil demand appears to be missing OPEC’s expectations that consumption would rise by just over 2 million bpd this year.

Demand in China is soft, while concerns about demand in the U.S. and possible economic slowdowns in America and Europe are depressing market sentiment.

Even OPEC admitted in its latest monthly report that Chinese demand has undershot expectations. Underwhelming data so far this year and expectations of softening Chinese demand growth prompted OPEC last month to cut its forecasts of oil demand growth this year and next, in the first downward revision since the organization issued its initial estimate for 2024 a year ago.

Oil demand is set to grow by 2.11 million bpd in 2024, a still “healthy” growth pace, well above the historical average of 1.4 million bpd seen prior to the pandemic, OPEC said. But the latest demand growth estimate is 135,000 bpd lower than the July assessment of a 2.25 million bpd increase. The downward revision reflected actual consumption data for the first and second quarters of this year, “as well as softening expectations for China’s oil demand growth in 2024,” OPEC said in its Monthly Oil Market Report (MOMR).

Despite OPEC’s first downward revision to its 2024 oil demand growth forecast, the gap between the cartel’s growth assessment and that of the International Energy Agency (IEA) is still 1 million bpd higher, with OPEC having the more optimistic view.

Most investment banks and analysts put this year’s oil demand growth estimates at around 1.2 million bpd to 1.5 million bpd, lower than OPEC’s optimistic view but higher than IEA’s projection of about 1 million bpd demand growth for 2024.

Analysts have also recently cut their oil price forecasts on the back of slower demand and rising non-OPEC+ supply.

Morgan Stanley has recently revised its oil price forecasts downward, reflecting expectations of increased supply from OPEC and non-OPEC producers amid signs of weakening global demand. The bank now anticipates that while the crude oil market will remain tight through the third quarter, it will begin to stabilize in the fourth quarter and potentially move into a surplus by 2025.

Goldman Sachs reduced last week its expected range for Brent oil prices by $5 to $70-$85 per barrel. Higher U.S. supply has been offsetting some of the seasonal demand, according to the investment bank. Efficiency gains among U.S. producers have raised shale supply by 200,000 bpd above Goldman’s expectations.

OPEC+ could decide to add supply on the market in a move that could be “strategically disciplining non-OPEC supply,” Goldman Sachs’s analysts wrote.

“Prices could significantly undershoot in the short term, especially if OPEC were to strategically discourage US shale growth more forcefully, or if a recession were to reduce oil demand,” the bank’s analysts noted.