[Salon] Oil: lower for longer? - ArabDigest.org

Oil: lower for longer? Summary: although OPEC+ will almost certainly extend existing cuts at its 26 November meeting and might agree modest additional trimming, growth in non-OPEC+ production is currently on track to see global output outpacing demand through 2024. We thank our regular contributor Alastair Newton for today's newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast, Oil: the long good-bye here. For several months the market mantra on interest rates — echoing central banks in general and the US Federal Reserve in particular — has been “higher for longer”. The fact that inflation has eased recently hasn’t changed this. However, it is looking increasingly like the semi-related mantra for oil should be ‘lower for longer’, especially in the wake of the 16 November sell-off which saw benchmark Brent crude fall through US$80 per barrel (pb) for the first time since July. Even though there was something of a recovery the following day, taking Brent back above US$80pb, unless we see an even sharper uptick this week OPEC+ looks sure to be considering further cuts in output when it meets on 26 November. Bearing in mind that less than two months ago Brent was at US$96.55pb and many analysts were forecasting three figures imminently, some of the sell-off was almost certainly attributable to an unwinding of long positions — possibly belated because of continuing concerns over the possible geographical spread of the war, which markets appear to have dismissed. Now this is done, investors are look increasingly to 2024, further encouraged by the International Energy Agency’s (IEA) November ‘Oil Market Report’, which was published on 13 November. The headline writers were quick to pick up on the following sentence in the report (and all too often turning “could” into “should” or even “will”!): With demand growth set to slow, the market could shift into surplus at the start of 2024. Similarly, commentators were inclined to ignore the following from the IAE report: For now, with demand still exceeding available supplies heading into the Northern Hemisphere winter, market balances will remain vulnerable to heightened economic and geopolitical risks – and further volatility ahead. Despite the IEA’s caution, its forecast of a possible (probable?) surplus next year is still important. What it means, in essence, is that OPEC+ has no choice other than to consider further cuts in addition to extending Saudi Arabia’s voluntary additional one million barrels per day (mbpd) which have brought its output down by a total of 25 percent to 9mbpd. Furthermore, Riyadh is likely to argue that it is already doing more than its share, especially when, according to Rystad Energy, Russia’s voluntary cut in output of 500,000bpd did not prevent it from shipping 354,000bpd more in October than its ceiling. (Three points of note here as follows: (a) total Russian oil shipments still fell slightly in October to around 7.5mbpd; (b) crude shipments per se are expected to fall this month thanks to a rebound in Russia’s refinery activity; and (c) although it is still a breach of the G7 price cap, according to Bloomberg benchmark Urals crude was trading at just US$66.19pb last week.) Growth in non-OPEC+ production is currently on track to see global output outpacing demand through 2024 [photo credit: OPEC] The price action notwithstanding, further trimming may seem curious at a time when, according to the IEA, the cuts already implemented… …look set to keep the oil market in a significant deficit through year-end, with the OPEC+ alliance pumping 900kb/d below the demand for its crude. What is happening here is the following: Growth in global output is beating forecasts “with October output up 320kb/d [month-on-month]. Record output from the United States, Brazil and Guyana underpin this year’s 1.7mb/d increase in global oil supplies, to a record 101.8mb/d”; and, “In 2024, non-OPEC+ producers will continue to lead global growth, projected at 1.6mb/d, to an unprecedented 103.4mb/d”. The impact of this is nothing like as dramatic as we saw in 2014-16 when US tight oil was seriously eating into OPEC market share. But cuts in output by OPEC+, both existing and future, still stand to boost non-OPEC+ market share, shifting the supply/demand balance away from the cartel. In consequence, Saudi Arabia looks to have no choice but to extend its voluntary cut of 1mbpd, which is due to expire next month, through at least the first half of 2024; similarly Russia. Furthermore, Bjarne Schieldrop, chief commodities analyst at SEB Research, quoted in a 16 November FT article, reckoned that “…Saudi Arabia will demand Kuwait, Iraq and the UAE chip in additional cuts, and that will be a painful discussion.” I agree. However, I think the UAE will push back for two reasons. First, Abu Dhabi’s long-running dispute with Riyadh over its baseline (the basis upon which its OPEC quota is calculated) has never been properly resolved despite a modest increase earlier this year. Second, as David Sheppard argued in a 17 November article in the FT, especially when it is about to host COP28 the UAE is mindful of its “growing role on the global stage” and keen to portray itself as a responsible player. As for a possible threat by Riyadh to undercut the entire market by boosting its output, I doubt this would carry the day. Indeed, rather than dragging partners into line it could cause a break-up of OPEC, as I laid out in the 11 July Newsletter. One obvious counterweight to this (also pinpointed by Mr Sheppard) is the possibility that, driven primarily by concern over possible domestic unrest, Gulf states in particular may feel obliged to agree to a cut in output as a gesture of solidarity with the Palestinians. However, I am not personally persuaded that this is likely to weigh heavily relative to economic considerations, including concern over a possible long term loss in market share to non-OPEC producers. I think more potent is the fact that, although the IEA is forecasting that demand in 2024 will reach a record 102.9mbpd, surplus supply throughout the year looks to be a distinct possibility, especially if global economic growth slows further as the IMF, inter alia, is forecasting. All this being said, for now at least my expectation is that — aside from extending existing cuts, be they voluntary or otherwise — any further trimming of output will be no more than minimal.