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Opec set for tricky new year: US booms and demand slows

A worker cycles past Aramco oil tanks in Abqaiq, Saudi Arabia Reuters/Maxim Shemetov
A worker cycles past Aramco oil tanks in Abqaiq, Saudi Arabia
  • 2024 likely to be challenging
  • Demand up 2m barrels a day
  • Opec+ under pressure

Opec+ has struggled to maintain high oil prices this year and 2023 is ending with Brent trading 10 percent lower year on year and below the crucial $80 break-even mark of GCC countries.

2024 looks likely to be another challenging year for the oil alliance, analysts have told AGBI.

Oil demand rose by more than 2 million barrels a day in 2023 and is on track to hit 101.7 million bpd, the International Energy Agency’s most recent report says.

But a slowdown of almost 400,000 bpd in the final quarter is expected to continue, the agency said. It attributed this to macroeconomic factors such as higher interest rates and a slowdown in the post-pandemic rebound.

The year began with optimism after the long-awaited reopening of China.

“But, as it progressed, we came to the conclusion that it was not firing on all cylinders and we started to drift lower,” said Ole Hansen, head of the commodity strategy at Saxo Bank.

Opec+, the Saudi-led Opec bloc of 13 countries and the Russian-led allies group of 10 nations, have sought to boost prices by implementing several output cuts over the past 14 months. 

These cuts helped to trigger a rally between June and September, Hansen said. Speculators drove prices up to nearly $100, but it has been sliding ever since.

“The focus has shifted towards the demand outlook. The deficit that the market has been counting on did not materialise, and we are heading to 2024 with money managers holding their shorts in crude on almost record levels, at least back to 2012,” he said.

Rolling over the voluntary cuts of 2.2 million bpd until March 2024 has not convinced the markets.

Christof Rühl, a senior research scholar at Columbia University’s Centre on Global Energy Policy, believes the alliance has “lost credibility” in its ability to manage the market.

US production breaks records

Analysts agree that the key factor pushing down oil prices is the boom in US output. The US is now producing more oil than any other country in history at more than 13 million bpd.

Output has also grown in Brazil and Guyana, and in Venezuela, after the US relaxed its sanctions.

Iranian production increased to 3.3 million bpd in November 2023 from 2.8 million in 2022, the energy research consultancy Wood Mackenzie says. 

Alexandre Araman, principal analyst at Middle East upstream at Wood Mackenzie, said: “Iran is poised to pursue its oil production growth in 2024.”

The International Energy Agency is forecasting that the record US, Brazilian and Guyanese production, along with surging Iranian flows, will lift world output by 1.2 million bpd in 2024. 

Rühl said: “These new non-Opec supplies are likely to be a permanent feature of the system. It puts Opec+ under pressure.”

The market share of Opec+ has fallen to 51 percent, its lowest level since the expanded alliance was set up in 2016.

A drilling rig at Zhetybay field in the Mangystau region of Kazakhstan, one of the countries in the Opec+ groupReuters/Turar Kazangapov
A drilling rig at Zhetybay field in the Mangystau region of Kazakhstan, one of the countries in the Opec+ group
Geopolitics and market share

Bill Farren-Price, a senior research fellow at the Oxford Institute for Energy Studies, said the downturn in Europe, demand in China and political/economic developments in the US could all have a big impact in 2024.

“Geopolitics has the potential to send fresh black swans into energy markets in 2024,” he said.

Rühl warned that “oil markets will continue to be under pressure if there is no major geopolitical event”, adding that Opec+ may look to implement more cuts but risks losing even more market share if it does.

Most of the analysts AGBI spoke to thought Saudi Arabia would extend output cuts beyond March if prices continue in the weaker range. 

“The kingdom would probably want to share the burden of cuts with its partners,” Farren-Price said.

If the strategy does not work, Saudi Arabia could also flood the market with its oil, damaging higher-cost producers. “But do they want to do it today? Not sure,” Rühl said.

He is convinced that, despite Opec’s statements, peak oil demand will arrive in this decade.

“When you have a shrinking market, the low-cost producer is king. We see all these guys cutting and, at the same time, expanding production capacity.

“You can bet that they are aware of the situation and creating capacity because they know tomorrow they will have to compete on volume.”

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