Opec+ on track to boost output for the first time in three years

Analysts see $70 as fair value for oil

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Published: Tue 10 Sep 2024, 8:49 PM

The Opec+ group will begin boosting oil output in 2025, for the first time since 2022, despite bearish forecasts that prices may fall between $60 and $70 per barrel due to sluggish demand from China and persistent global oversupply.

The alliance of oil producers led by Saudi Arabia and Russia decided last week to delay the unwinding of its production cuts that were planned to begin in October. The first addition to supply, of 180,000 barrels per day (bpd), is now expected in December.

Opec+ members, who were planning to start easing the cuts in October, agreed in a virtual meeting that they would extend the current cuts until the end of November, after which these cuts will be gradually phased out on a monthly basis starting December 1st, 2024.

“We think in 2025 for the first time in a couple of years, first time since 2022, Opec+ will increase production,” Jim Burkhard, vice president of research at S&P Global Commodity Insights, said at the conference in Singapore organized by S&P.

The decision to delay the supply boost came after oil prices crashed early last week to the lowest level in nine months, and the lowest so far this year, market watchers said.

Analysts at Morgan Stanley see rising headwinds on the demand side, which has been their key reason for cutting their Q4 oil price forecast. Just two weeks after lowering its Brent oil price estimate to $80 per barrel for the fourth quarter, Morgan Stanley cut again its forecast, now expecting the international benchmark to average $75 a barrel in the last quarter of the year. “The recent trajectory of oil prices has similarities to other periods with considerable demand weakness,” Morgan Stanley analysts wrote in a note. Amid weaker-than-expected Chinese demand, and concerns about near-term Chinese and US demand, the prospect of adding supply as early as October had worried markets that the oversupply next year would be higher than previously thought.

Concerns about oil demand in China, fears of slowing US and European economies, and hopes of a restart of Libya’s production halt also added to the bearish sentiment in the market in the past week.

Vijay Valecha, chief investment officer, Century Financial said Opec+ delaying its oil-output increase won’t solve ‘pervasive’ worries over weak demand.

Goldman Sachs has lowered its expected range for Brent oil prices by $5 to $70-$85 per barrel, on the back of weaker Chinese oil demand, high inventories, and rising US shale production. Citi sees $60-per-barrel oil prices next year if Opec+ fails to implement more production cuts.

Global commodity traders Gunvor and Trafigura anticipate oil prices may range between $60 and $70 per barrel due to sluggish demand from China and persistent global oversupply.

Oil’s fair value is $70 per barrel as there is more oil currently produced globally than consumed and the balance is set only to worsen over the next few years, said Torbjorn Tornqvist, co-founder and chairman of energy trader Gunvor. “The problem is not in Opec, because they’ve done a great job to manage this,” Tornqvist said. “But the problem is that they don’t control where the growth is right now outside Opec, and that’s substantial.”

Oil is vulnerable to price spikes from geopolitical events or supply disruption due to a record number of short positions in the market, Luckock and Jeff Currie, chief strategy officer of energy pathways at US investment giant Carlyle Group, warned. “The market has become incredibly relaxed about disruption, because it’ll argue that there’s millions of barrels of spare capacity. But it can change,” Luckock said.