Oil market update - Tapering of OPEC+ cuts from October

Brent prices averaged 82.9 $/b in May as the upward trend since the start of 2024 reversed and the risk premium eased following a de-escalation of the geopolitical tensions in the Middle East after the unprecedented Iranian attack on Israel. Furthermore, supply uncertainty ceased as OPEC+ decided to prolong voluntary cuts till the end of 2024.

Oil market drivers

From the supply side, ahead of its long awaited meeting, and after deferring the in-person planned meeting by one day and switching to an online format, top officials from Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman gathered in person in the Saudi capital to discuss the voluntary cuts. Later on, OPEC+ members met virtually on 2nd of June and decided, as previously expected by the IEA and many analysts, to prolong their voluntary cuts till the end of 2024, keeping the market tight with almost 2 mb/d off the market. Additionally, in an unexpected caveat the cartel announced a phasing out of the cuts to take place over one year on a monthly basis, starting in October 2024 and until September 2025. However, OPEC+ emphasized that the increase in production is subject to market conditions. Brent prices are currently trading around 80 $/b.

Relatedly, the IEA expects non-OPEC+ countries to increase supply, especially from the US, Canada, Brazil and Guyana, adding around 1.4 mb/d in 2024 and 2025 which will keep a lid on prices in the coming months. Moreover, crude and end products stockpiles have been witnessing an increase last month giving more relief to the market.

Markets have been vigilant to any geopolitical tensions especially to the escalation scenario between Israel and Iran. However, with the latest signs of de-escalation, we have seen the risk premium in oil prices go down significantly as can be seen in chart above (left) where Brent prices have been trading below 85 $/b during most of May.

Against these developments, market bullishness has dissipated, with speculative net long positions halved from the peak seen in April (see left hand chart below). Meanwhile, Brent-gasoline crack spreads witnessed a decrease over May reflecting the weakness of oil product cracks across the barrel, which in turn indicate an upcoming bearish impact on prices (see right hand chart above). However, markets remain vigilant and responsive to any developments on the geopolitical front.

From the demand side, there are no signs of strong recovery from main markets yet. Crude demand from China, as reflected by the volumes of crude imports, witnessed a decline last month, while that of Europe remained constant as shown in the chart above (right). Relatedly, following the reemployment of sanctions on Venezuela, Chinese imports of Venezuelan oil are likely to increase as other buyers avoid any run-ins with the US.

Outlook

Given the above-mentioned developments, we retain our outlook for Brent in the third quarter of 2024 to average 85 $/b, and the end of year price of 90 $/b following the expected recovery in economic activity later in the year.