Bearish Sentiments Rationalize OPEC+ Rollover Into 2H24

*By Faisal Faeq

OPEC+ producers will meet in June to decide on output policy for the second half of the year whether to keep it unchanged or to gradually increase production.

OPEC+ output strategy won’t be impacted by the latest oil prices deterioration, but the bearish sentiments have put downward pressure on oil prices amid gloomy oil demand outlook, faltering growth in China, and abundant crude supplies from the US, Brazil and Guyana, which illustrated that the world doesn’t need more supplies. This is in addition to inflation and election year pressure on gasoline prices. OPEC+ producers output policy is also affected by the uncertain global economic outlook while OPEC also remains positive about oil demand growth through 2025.

OPEC+ crude production fell 210,000 barrels per day (bpd) month on month to 41.04 million bpd in April as Russia began to implement a deeper output cut amid a string of Ukrainian drone attacks on its refineries. April production data will be the most recent available to OPEC+ ministers when they meet in June to set production levels, according to S&P Global.

Oil prices movement was clearly pressured by bearish sentiments and the latest US economic data that sparked concerns over oil demand. Brent crude price dropped from $91/bbl in early April to $82/bbl (biggest weekly drop in three months) as geopolitical tensions only added to the downward pressure on oil prices while never putting an upward pressure. US inflation data adversely impacted speculative activities in the futures market.

Tight supplies in the physical SPOT market for prompt barrels indicate that Brent crude price should have continued holding above the $90/bbl mark but the inflationary pressure dropped the price below while technical indicators that prompted money managers to sharply increase their bullish positions suggest otherwise. Geopolitical tensions and output cuts should have outweighed caution around the postponed US Fed rate cut.

OPEC forecast global oil demand to grow by 2.2 million bpd and reach 104.5 million bpd in 2024, and to grow by 1.8 million bpd to reach 106.3 million bpd in 2025 bolstered by strong air travel demand and healthy road mobility, including on-road diesel and trucking, as well as healthy industrial, construction and agricultural activities in non-OECD countries. Similarly, capacity additions and petrochemical margins in non-OECD countries – mostly in China and the Middle East – are expected to contribute to oil demand growth. However, this forecast is subject to many uncertainties, including global economic developments.

The latest available data for OECD commercial oil stocks show a drop by 25.7 million barrels, m-o-m to 187 million barrels below the 2015–2019 average while global oil inventories, which typically increase in 1H, still remained relatively unchanged.

Some market participants suggest that OPEC+ should start a gradual return of curtailed barrels due to stronger than expected oil demand growth. However, higher interest rates negatively impacted economic growth and put downward pressure on oil prices since 2H23. Hence, OPEC+ should start tapering output cuts at least 6 months after the Fed starts reducing interest and re-stimulate economic growth.

This shouldn’t take place in 2H24 but in 1H25 if and only if economic recovery proves itself to exist tangibly. Bearing in mind the US presidential election, immense downward pressure on oil prices.

*Energy Adviser (former OPEC and Saudi Aramco)

Twitter: @FAISALFAEQ