Oil market update - Cuts to be offset by more Non-OPEC+ supply
Brent has been witnessing an upward trend since the start of 2024, driven mainly by a combination of Red Sea attacks and the extension of additional voluntary cuts by some members of OPEC+. Better than anticipated data for the Chinese economy in January and February pushed prices upwards last week. Supply from the US and other non-OPEC+ countries is expected to increase in Q4, offsetting largely the impacts of the voluntary cuts and retaining a lid on prices.
Brent prices averaged 80.73 USD/b during February and early March. An upward trend has been in place since the start of 2024, driven mainly by a combination of Red Sea attacks and the additional voluntary cuts by some members of OPEC+. Furthermore, last week witnessed a surge in prices, almost hitting 87 USD/b, triggered by better than expected data for the Chinese economy in January and February.
Red Sea attacks have affected oil prices through higher transportation costs, encouraging refineries to go local where possible. Since it started the conflict has only escalated with US and UK airstrikes on Houthi targets and continuous attacks by the Houthi on different vessels. Thus, resolution of the conflict does not appear imminent and geopolitical risks are here to stay, adversely affecting the oil markets and giving hard time for refiners who need to be very flexible.
Following data on slowing demand growth, and to avoid potential global supply surplus, especially with record high US shale production, several OPEC+ countries (Saudi Arabia, United Arab Emirates, Iraq, Kuwait, Kazakhstan, Algeria, Oman, and Russia) announced early March the extension of its voluntary cuts for the second quarter of 2024. Though data showed that Iraq and Kazakhstan did not comply fully with the agreed limits in January and February. Iraq pumped around 190,000 barrel per day more than its agreed limits of 4mb/d, which created a debate among members of the cartel. The two countries pledged to adhere to their assigned target from now on. It is worth noting that there is no formal meeting scheduled to revise voluntary cuts before the upcoming ministerial conference in Vienna on 1st of June.
OPEC expects global demand to grow by a 2.2 million barrels per day (mb/d), driven mainly by China. Recent figures on the performance of the Chinese economy in January and February point to some improvement. The data came stronger than expected by the majority of analysts, but illustrated remaining imbalances. Industrial production grew by 7.0% yoy ytd (consensus: 5.2%, 2023: 4.6%), and also showed solid growth in monthly terms in January/February (see more ). However, this optimistic view on oil demand is not shared fully by other market participants. For example, Saudi Aramco expects a slower demand growth of 1.5 mb/d for 2024, while the IEA anticipates that figure to be around 1.2 and 1.3 mb/d.
Exports from the US are almost 1 mb/d higher in February than those in late January. Data in mid-March shows that the US exported almost 4.9 mb/d out of its 13.1 mb/d total production. IEA’s forecasts for US and non-OPEC+ supply to surge in Q4 which helps in offsetting the impact of voluntary cuts and retains a lid on prices (see right hand chart above).
Outlook
Demand is foreseen to stay stable in the coming months as sluggish economic growth is expected to continue in Q2 2024 in main markets (China, the EU and the US), while interest rates cuts are anticipated to start only in June in the US and eurozone. At the same time, geopolitical developments will keep an upward pressure on prices, while non-OPEC+ supply will induce an opposite effect. Accordingly, our outlook for Brent is to average around 85 USD/b in the second quarter. Following the expected cuts in interest rates, which should increase expectations of a recovery in demand, we expect Brent to reach 90 USD/b by the end of 2024.