Oil Market Expected To Be In Surplus Despite OPEC+ Measures
Oil prices have come under considerable pressure this year, with markets concerned about demand and surplus expectations for 2025. Even after a decision by a handful of OPEC+ members to delay the restoration of an additional voluntary production cut of 2.2 million barrels per day, our balances still suggest the market will be in surplus by 2025 – albeit a more modest surplus following the group’s actions. The expected surplus has shrunk from more than 1 million barrels per day to around 500,000 barrels per day currently.
Non-OPEC supply is expected to grow by about 1.4 million barrels per day in 2025, outstripping demand growth expectations of just under 1 million barrels per day next year.
The surplus environment means prices will likely remain under pressure, with our forecast for ICE Brent crude to average $71 per barrel in 2025.
This view has clear risks, including tighter sanctions on Iran and a decision by OPEC+ to delay the restoration of 2.2 million barrels per day of supply. Additionally, there is growing instability in the Middle East – and the market is still somewhat complacent about this.
OPEC+ has proven the market wrong, but can this continue?
The actions taken by OPEC+ in early December showed participants that the group appears committed to trying to keep the market balanced. We believe that lower prices and increased supply from countries outside OPEC and some members producing above their production targets will make it increasingly difficult for the group to maintain the deep cuts we have seen.
The group proved us wrong at its December meeting, not only delaying the gradual restoration of 2.2 million bpd of supply from January to April but also planning to increase supply at a slower pace. This means the group plans to restore full supply in 18 months, compared to the 12 months it previously took. So, instead of adding about 180,000 bpd of supply per month, the group will add nearly 140,000 bpd daily.
While the delay in the replay may slightly increase the market floor, we do not believe it changes the fundamental issue. Ultimately, the group will have to accept lower prices. Otherwise, it will continue to lose market share to non-OPEC producers.
Following recent actions by OPEC+, the group could extend production cuts further in 2025 if necessary. However, it is important not to rule out the risk of increased discord within the group, especially if oil prices remain under pressure. Low oil prices mean less oil revenue for OPEC members, affecting many producers’ financial balance sheets in the Middle East.
The way to maintain oil revenue is to increase oil production. Therefore, if prices trend downward, compliance from some members may decline. We have seen some producers exceed production targets for much of this year.
Saudi Arabia has expressed concerns about some members not complying with production cut targets and the risk of oil prices falling too low – perhaps an indirect threat that they will increase production if members do not comply with production cut targets, potentially sparking a price war.
We don’t have to go back too far to see the potential impact this could have on the market. In 2020, a price war between Saudi Arabia and Russia led to a sharp drop in oil prices, although this coincided with the Covid-19 pandemic.
OPEC’s spare capacity continues to provide relief to the market
For much of this year, there has been a lot of focus on geopolitical events in the Middle East and concerns that escalation could impact Iranian supply and potentially regional supply. However, despite the tensions, oil supply has not been disrupted, meaning that the market is increasingly immune to developments in the Middle East. We may need to see actual disruptions in supply to push oil prices significantly higher.
The spare capacity of OPEC provides some comfort to the market. OPEC has over 5 million barrels per day of spare capacity, so if there is a supply disruption, there is enough capacity to compensate for any disruption. However, OPEC may be slow to restore energy supplies and wait for higher prices. Saudi Arabia’s breakeven oil price is over $90 per barrel, so they would like to see prices close to that level – although they don’t want to push prices too high given the risk of destroying demand.
This spare capacity will not be very useful if oil flow through the Strait of Hormuz is disrupted, as most of OPEC’s spare capacity is in the Persian Gulf, and these supplies must pass through the Strait of Hormuz.
What does Trump mean for the Iranian oil supply?
Iran’s supply has increased significantly in the past two years, with production increasing from about 2.5 million barrels per day in early 2023 to about 3.4 million. The United States does not impose strict oil sanctions on Iran, which has increased export flow. However, with US President-elect Donald Trump entering the White House in January, there is a possibility that he will take a tougher stance on Iran as he did in his first term.
If Trump can enforce sanctions effectively, this could put about 1 million barrels per day of supply at risk. However, since almost all of Iran’s exports go to China, it may not be easy to reduce those flows significantly. We assume the Iranian supply will remain at around 3.3 million barrels daily in 2025, with clear downside risks. However, any reduction in Iranian supply could make OPEC+ more comfortable to begin canceling additional voluntary production cuts as currently planned.
What does Trump mean about the US oil supply?
In the short term, we do not expect the incoming Trump presidency to bring major changes to oil supply. US oil producers will be more price-dependent and will have less incentive to significantly increase drilling activity because the global market will be well supplied in 2025.
WTI prices of around $65 per barrel in 2025 and 2026 are not far from the levels producers need to drill new wells profitably. The Dallas and Kansas Energy surveys show that producers need an average of $64 per barrel.
We assume that U.S. oil production will grow by about 300,000 b/d in 2025 to a record 13.5 million b/d. This is similar to the growth estimated for 2024 but more modest than the growth rate before the COVID-19 outbreak.
In the medium to long term, a Trump presidency could bring benefits through reduced regulation (which would help reduce production costs) and faster approval of pipeline infrastructure (which would help overcome persistent bottlenecks in the supply chain), and it could reverse some of the president’s thinking. Joe Biden’s policy on federal land leasing. Onshore oil production on federal lands accounted for 12% of total oil production in 2023; this number grows to about 26%, including offshore production.
The Biden administration has reduced lease sales on federal lands and increased royalty and bond requirements for production on federal lands. If we compare the number of new leases issued in the first three years of Trump’s administration, which totaled more than 4,000, to the first three years of Biden’s administration, the total number of new leases issued was just over 1,400, but the decline in lease issuance has little impact on production. Oil production on federal lands has grown yearly since Biden took office.
Trade Tensions and Oil
Escalating trade tensions have raised concerns in the oil market and risk assets. Trump’s recent statements suggest that he may discuss trade policy sooner than expected, which means there is a chance that tariffs could be implemented in the second or third quarter of 2025. The difference between the 2018 China-U.S. trade war and this one is that Trump is considering potential tariffs on all trading partners.
The risk is that some trading partners will impose retaliatory tariffs on the United States, which could affect demand for U.S. oil and refined products.
During the 2018 US-China trade war, Chinese oil buyers were reluctant to purchase US crude oil due to the risk and eventual implementation of tariffs. This caused the discount of WTI to Brent to widen from around $3 per barrel to over $11 per barrel in 2018.
An escalation of the trade war and retaliatory tariffs (or even the risk of tariffs) could put the spread between WTI Texas Intermediate and Brent under pressure again. However, at the beginning of 2018, about a quarter of US crude oil exports went to China, and this share has now fallen to around 7%, so we may not see much spread pressure.
Moderate growth in oil demand in 2025
Global oil demand has disappointed in 2024, with growth expected to be less than 1 million barrels per day this year. China has been the main driving force in this regard. At the beginning of the year, China was expected to account for more than 50% of global demand growth. Now it is expected to be only around 20%.
Cyclical and structural trends have driven China’s slow growth. It is clear that the economy has performed weaker than expected; the real estate sector remains a drag while manufacturing activity and consumer spending are not very good. The government has announced several support measures, but the full impact of the stimulus remains to be seen. With the possibility of trade frictions next year, China may be forced to introduce more stimulus measures.
In addition, rising sales of new energy vehicles in China’s domestic market will squeeze out oil demand. Now, more than 40% of car sales are new energy vehicles. In some parts of China, sales of liquefied natural gas-powered trucks have rebounded significantly, which will also replace demand for diesel.
However, it is not just China that is troubled by weak demand. Refinery margins have fallen globally this year, indicating a decline in demand for refined products.
Global oil demand is expected to resume moderate growth next year, with an expected increase of just under 1 million barrels per day. This growth is expected to be driven primarily by Asia.
