Oil Market Outlook: Stability and Support Despite OPEC+ Output Restoration Plan
Chief Investment Office Daily Updates
June 3, 2024
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Thought of the Day
Oil markets have been volatile, reacting to the weekend’s OPEC+ agreement on production policy. Brent crude was trading below USD 81 per barrel early Monday, following three consecutive days of declines and a 7.1% fall for May.
OPEC+ announced it would extend its group cuts of 1.66 million barrels per day (bpd) until December 2025, while also planning a small production quota increase for the UAE next year (300,000 bpd). Additionally, there is a clear timeline for potentially unwinding 2.2 million bpd in voluntary cuts starting in October 2024.
Despite some bearish outlooks, we maintain a positive stance on the supply and price outlook for oil for several reasons:
Conditional Voluntary Curb Tapering
The timeline for adding back oil from the voluntary cuts is conditional on market conditions. OPEC leadership stated that “the monthly increases can be paused or reversed subject to market conditions.” With Saudi Arabia holding significant influence over the bulk of these cuts, any signs of excessive supply or sharp price declines would likely delay the proposed timeline.
Impact on Non-OPEC+ Producers
Transparency on OPEC+ plans to return oil to the market will affect other producers’ strategies. Lower oil prices have already reduced drilling activity in the US, impacting US oil production growth. The prospect of increased crude supply may lead non-OPEC+ producers to further slow down their investments and capacity expansions. US output growth year-to-date is less than half of last year’s, supporting our expectation that non-OPEC+ production growth will slow to 1.4 million bpd this year, down from almost 2.4 million bpd in 2023.
Strong Oil Demand
Real-time mobility data indicates robust oil demand growth. We anticipate global oil inventories to decrease in the coming weeks as demand rises seasonally over the summer. Driven by emerging markets, we estimate demand growth of 1.5 million bpd for 2024, surpassing the long-term annual growth rate of 1.2 million bpd.
Benefits of OPEC Transparency for Oil and Gas Investors
The renewed transparency from OPEC is highly beneficial for partners investing in oil and gas drilling and exploration. Clear guidance on production plans and timelines allows investors to make more informed decisions about capital allocation and project planning. With a better understanding of potential supply fluctuations, companies can adjust their strategies to mitigate risks and seize opportunities in the market.
Furthermore, transparency fosters a more stable market environment. Knowing that OPEC+ can pause or reverse planned production increases based on market conditions reduces uncertainty. This stability is crucial for attracting long-term investments, as it enhances confidence in the market’s ability to avoid severe price disruptions. Investors can rely on OPEC’s commitment to balance supply with demand, ensuring a more predictable and supportive backdrop for exploration and drilling activities.
Conclusion
While we may experience some near-term price volatility due to supply concerns, we remain optimistic about crude prices. Additional barrels are likely to come back to the market from October only if it can absorb the supply increases, and OPEC+ has demonstrated cohesion and caution in their approach. We expect Brent crude to trade around USD 87 per barrel by year-end. We continue to recommend risk-seeking investors to mitigate downside price risks in crude oil. Furthermore, ongoing geopolitical tensions in the Middle East support allocations to portfolio hedges like crude and gold.
