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Weak global growth likely to weigh on oil prices next year

Rise of non-Opec supply narrows options for producer group, Emirates NBD Research says

Oil markets will face another year of soft demand in 2025 as major economies record weaker headline growth and structural factors like a growing electric vehicle fleet eat into demand, recent research suggests.

According to Emirates NBD Research, the Organisation of Petroleum Exporting Countries and its allies, collectively known as Opec+, has run out of room to add barrels back to the market with limited price impact as demand ebbs and non-Opec+ supply continues to grow.

Opec+ members are likely to doubt the effectiveness of restraining production if it means market share is eroded with no parallel support for prices. “Oil markets will swing into a surplus in 2025 even if Opec+ were to delay returning output,” a report by Edward Bell, head of market economics at Emirates NBD said.

Emirates NBD expects oil prices will decline on average in 2025. “We target Brent futures at an average of $73 per barrel and WTI at an average of $71 per barrel , down roughly 9 per cent and 7 per cent year on year respectively,” Bell wrote.

A disorderly end to the Declaration of Cooperation (Opec+ production management) would mean substantial downside risk for prices if producers fought for market share.

Consensus projections for major economies in 2025 is a slowdown in activity. For China, growth is projected to dip to 4.5 per cent from consensus estimates of 4.8 per cent this year even as the government is taking significant stimulus steps to try and improve consumer and investor confidence. The US economy is set to cool to 1.7 per cent real GDP growth in 2025 from 2.5 per cent this year as the Federal Reserve attempts to keep a soft landing in place.

Beyond China and the US few other major oil consumers will show robust demand next year. India will be the strongest case for higher oil consumption in 2025 with the IEA expecting 220,000 barrels per day (bpd) of growth, providing more than a fifth of forecast demand growth. “But elsewhere, the long-running trends of diminishing oil demand, particularly for transport fuels, will make themselves felt again with demand set to decline in European economies as well as Japan,” Emirates NBD noted.

Against this flat-lining demand outlook, Opec+ producers face challenging prospects for 2025. Opec+ has already had to delay returning production to markets in October 2024 as planned. “But with producers outside the Declaration of Cooperation (Opec+) not subject to policy restraint on their output, Opec+ is running out of low-risk opportunities to restore production close to capacity and recapture market share,” Bell said.

The amount of oil Opec will need to produce to keep oil markets in balance is expected to fall to an average of 26.2 million bpd in 2025, down from 27.2 million bpd in 2024. “This ‘call on Opec crude’ nets non-Opec crude and Opec natural gas liquids from demand, leaving the room available for Opec countries to fill. If Opec countries increased output in line with the Opec+ targets for next year, oil markets will shift into a substantial surplus even with an assumption that Iran holds production at current levels,” the report said.

Emirates NBD feels that an oil market surplus of much more than two million bpd on average would be ‘calamitous’ for oil prices and the expectation of an over-supplied market next year has more than likely been the catalyst for the drop in oil prices over the last several weeks.

Voluntary cuts

Since April 2023, when new voluntary cuts from some Opec+ members were announced, production among the Opec members of the DoC has dropped to less than 22m bpd and has pushed collective idled capacity (voluntarily cut and spare capacity buffer) to nearly six million bpd, data shows. “Adding in spare capacity from Opec members outside of the DoC, total spare capacity is about 6.5 million bpd,” Bell said.

Opec+ is likely to plan to increase production gradually over the course of 2025 to avoid ceding market share any further to competing producers. “But adherence to target levels remains a challenge to the effectiveness of Opec+ stewardship of oil markets,” the report said.

Apart from a softer demand profile for 2025, non-Opec+ production will also be another headwind for prices. Oil production in the US is projected to increase by 420,000 bpd to 13.7 million bpd on average and end the year just short of 14 million bpd , according to the EIA’s latest short-term energy outlook. Production is also due to increase from Brazil, Canada and Guyana with the EIA projecting a total of 90,000 bpd of non-Opec+ supply increases outside of the US.

Upside risks to Emirates NBD’s oil price assumptions stem from an escalation of geopolitical risks that directly impact production or shipment of oil, particularly in the Middle East and North Africa region. “A better-than-expected demand profile may also emerge, abetted by looser fiscal or monetary policies as policymakers seek to support growth. However, the pass-through to higher oil demand from lower rates is contingent on underlying physical demand receiving a boost, more so than a weaker US dollar pushing prices higher,” Bell said.

The major downside risk for prices, in Emirates NBD’s view, is if the Opec+ alliance fragments as individual members question the value of restraining output only to receive lower prices and to lose market share. “A breakdown of Opec+ integrity would prompt a contest for market share, similar to what occurred in Q2 2020 when oil prices ended up in free fall,” Bell said.