When OPEC+ ministers meet this weekend, they face an unpleasant choice: either continue to restrict oil supply until 2025 or risk a further plunge in oil prices.
As China's oil demand slows and supply surges across the Americas, representatives indicated that the OPEC+ led by Saudi Arabia and Russia will again discuss delaying production increase plans, potentially for several months.
However, if OPEC+ wants to prevent oversupply, it may need to do more. The International Energy Agency (IEA) predicts that even if the alliance fully cancels production increases, there will be an oversupply next year. Citigroup and JPMorgan warn that Brent crude prices could plummet from $73 per barrel to $60, and if OPEC+ opens the taps, oil prices could fall further.
A renewed sell-off in the oil market would impact Saudi finances, which have already been forced to cut spending on lavish economic transformation plans. This does not even take into account the impact of President Trump's potential return on the oil market. Trump has promised to increase U.S. crude oil production and threatened punitive tariffs on China.
Torbjörn Törnqvist, co-founder and CEO of Gunvor Group, said at the Energy Intelligence Forum held in London on Tuesday, "I don't think they have room to increase (production), and the market will remind them when necessary."
Earlier that day, Saudi Energy Minister Prince Abdulaziz bin Salman met in Baghdad with Russian Deputy Prime Minister Alexander Novak and Iraqi Prime Minister Mohammed Shia' al-Sudani. According to statements from the countries, they discussed the importance of maintaining market balance and fulfilling production cut commitments. The alliance of 23 countries will hold an online meeting on Sunday.
OPEC+ in a dilemma
When OPEC and its allies held a meeting nearly six months ago, the situation was vastly different from now. The alliance believed the surge in global oil consumption post-COVID-19 would continue, thus announcing a roadmap to restore production cuts made since 2022, with plans to gradually restore 2.2 million barrels per day starting in October.
But since then, things have changed.
Since early July, Brent crude futures have fallen by about 17%, shaking off the impact of Middle Eastern conflicts, while China's oil demand has contracted for six consecutive months. According to IEA data, Chinese consumption, which has powered the oil market for the past twenty years, may have peaked.
The Paris-based agency predicts that with the acceleration of electrification, global oil demand is expected to grow by about 1 million barrels per day next year, which is less than half of what it was in 2023.
The report states that new supply waves from the U.S., Brazil, Canada, and Guyana will make this figure look dim, with daily oversupply in the oil market exceeding 1 million barrels.
Morgan Stanley analyst Martijn Rats stated, "The oil market seems poised for a significant surplus by 2025."
Even before the oil market digests the effects of Trump's second term, the outlook for OPEC+ has already become concerning. Trump has promised to encourage U.S. oil production and warned of harsh trade tariffs on some countries, including China.
Nevertheless, forecasts could also be wrong, and if the oil market avoids bearish predictions, it will make OPEC+'s task of resuming production increases easier.
Murray Auchincloss, CEO of BP, said at a meeting in London on Monday that global oil demand is expected to rise unexpectedly and will show strong growth over the next 5 to 10 years.
Jeff Currie, Chief Strategist for Energy Pathways at Carlyle Group, said that oil prices are currently "trying to price in a future oversupply that has not yet materialized." The pullback in oil prices has eroded the outlook for supply growth and reduced the likelihood of achieving oversupply.
Currie said, "Any possibility of a bear market in oil is driven by demand, and with China already introducing stimulus measures, the likelihood of an unexpected demand shock is limited."
Another scenario supporting oil prices is that Trump may resume his 'maximum pressure' policy used during his first term to curb Iranian crude oil exports and limit the country's nuclear program.
"If the current Trump is really going all out, reducing Iranian oil exports by 1 million to 1.2 million barrels per day, that would eliminate the oversupply by next year," said Bob McNally, founder of Rapidan Energy Group and former White House official. "This makes it easier for OPEC+ to increase production."
However, if the U.S. does not restrict Iranian crude oil, OPEC+ may need to stick to production cuts. This will be a challenge for several member countries, particularly Iraq, Russia, Kazakhstan, and the UAE, which have been struggling to implement the supply restrictions they were supposed to put in place at the beginning of this year.
Given the recent increase in production capacity, the UAE will be allowed to gradually increase additional output by 300,000 barrels per day. Kazakhstan does not have such authorization, and the country has begun large-scale expansion of the Tengiz oil field, which may further test its commitment to the OPEC+ agreement next year.
Natasha Kaneva, head of global commodities research at JPMorgan, stated that the longer the oversupply persists, the greater the likelihood that OPEC+ members will grow tired of production quotas and seek to reclaim individual market shares, as they did during the policy 'reset' periods of 2014 and 2020.
She said, "By 2026, increasing oil production may become a key consideration for some OPEC members," at which point the risk of a market reset will be higher.
Article reposted from: Jin Shi Data