Oil markets are eagerly awaiting the OPEC+ meeting on Sunday, November 26, 2023, in anticipation of what Saudi Arabia’s leader will decide regarding its voluntary cut in crude oil production by 1 million barrels/ j.
Whichever path they take, Saudi Arabia’s decision to cut production will ultimately determine the near-term future of global oil prices.
The kingdom is seeking to balance its desire to keep prices high by limiting supply, knowing that doing so would lead to a further decline in its overall market share.
Crude prices have come under significant downward pressure in recent weeks, with prices falling below US$80 a barrel last week after a sell-off sparked by concerns of oversupply.
This recent drop could be an indicator of what will happen at the OPEC meeting, since the Saudis have repeatedly demonstrated that their floor price is above $80 per barrel.
The main topic of the 36th OPEC and non-OPEC ministerial meeting on Sunday, November 26, will be the confirmation of next year’s production quotas, which were worked out at the group’s meeting in June.
Saudi Arabia announced its voluntary cuts on the sidelines of the meeting, initially pledging to cut production by 1 million bpd for July.
This measure was then extended on a monthly basis until August and September, while in early September, Riyadh announced the extension until the end of this year.
Oil markets will be looking to see whether Saudi Arabia extends these cuts until 2024 or whether it chooses to phase them out or simply let them expire at the end of this year.
Regardless, Saudi Arabia’s decision will have significant implications for oil markets and, in particular, the price of oil next year.
Rystad Energy’s latest unresolved liquids review, which assumes the Saudi voluntary cuts will not be extended until 2024, shows that supply has surprised on the upside and we now expect a balanced market for the 1T24.
More importantly, a looming market surplus of over 600,000 b/d is in sight for 2Q24.
Looking ahead, the second half of next year is expected to show a deficit of around 450,000 b/d.
Overall, we now expect the oil market to be fairly balanced in 2024 compared to the large deficit (-1.2 million b/d) this year.
This latest unresolved liquids balance is lower than we expected just a few weeks ago, when we forecast a deficit of 400,000 b/d for 2024.
In addition, downward pressure on oil prices has increased in recent weeks: prices fell below $80 per barrel on November 16, following a sharp sell-off caused by supply fears. surplus.
This figure is significantly lower than oil price levels immediately following the outbreak of the conflict between Israel and Hamas that began in early October, when prices reached nearly $95 per barrel.
Further fueling the bearish sentiment, recent data shows that U.S. commercial crude inventories have increased over the past four weeks and now stand at 440 million barrels, up from 420 million barrels a month ago .
Despite our latest global mobility indicators showing strong demand, with road traffic above 2019 levels and air traffic stable, macroeconomic concerns continue to ripple through the market.
This recent downward trend in oil markets has increased interest in Saudi Arabia’s upcoming move on voluntary cuts.
Rystad Energy has developed five scenarios based on Saudi production policy for the coming months and estimates the impact they would have on oil prices. Especially:
- No extension scenario: we assume that the Saudi reductions will not be extended until 2024.
- Rapid unwinding scenario: We assume that Saudi Arabia will unwind the voluntary reductions very quickly so that they are fully unwound by April 2024.
- Gradual dismantling scenario: Saudi Arabia gradually unwinds voluntary reductions until June 2024.
- Slow unwind scenario: Saudi Arabia extends voluntary reductions of 1 million b/d until January and February 2024, then unwinds them very gradually until July 2024.
- Reduction extension scenario: Saudi Arabia extends voluntary reductions of 1 million b/d until April 2024 and, thereafter, gradually reverses them until August 2024.
Our analysis shows that in the event that Saudi Arabia does not extend its voluntary cuts, the market’s downward trend will continue, with the price of oil averaging slightly above US$80 per barrel next year. .
At the other extreme, if Saudi Arabia extends voluntary cuts until April 2024 and then gradually rolls them back, the price of oil will average $96 per barrel in 2024.
The latest IMF estimate suggests that the equilibrium price for Saudi oil is $86 per barrel.
Our analysis suggests that the Saudis will need to continue to cede market share, at least until June 2024, to reach this price level.
Will the Saudis do it? All eyes will be on Vienna next week and Saudi Arabia’s next move.