[Salon] Oil: throwing in the towel? - ArabDigest.org Guest Post

Oil: throwing in the towel? Summary: press reports suggest that Saudi Arabia will start to unwind its voluntary cuts in output from 1 December despite Brent having broken through its US$75pb ‘floor’. In the absence of a sustained geopolitical shock expect the ppb to settle below US$70 per barrel until at least mid-2025. We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast, Of peak oil, grey rhinos and $70 a barrel here. In the 30 August Newsletter I argued that the long-standing ‘floor’ of US$75 per barrel (pb) for Brent crude was seriously under threat and that OPEC+ would therefore have to think seriously in the coming days about its proposed unwinding of voluntary cuts from 1 October. Since then we have seen three important developments, as follows: At the start of September investors did indeed throw in the towel on the US$75-85pb range in which Brent had been pretty much stuck since the start of the year, to the point where the price per barrel (ppb) even dipped (briefly) below US$70; On 5 September OPEC+ members ‘rolled the barrel down the road’ (i.e. the oil producers’ equivalent of kicking the ball into the long grass) until — provisionally — December to start unwinding the voluntary cuts; and The sharp uptick in Hezbollah/Israel tensions at the start of last week pushed the ppb up by around US$4pb which, allowing for some prior pricing in of geopolitics, suggests that the risk premium currently sits at around US$6pb. Press reports suggest that Saudi Arabia will start to unwind its voluntary cuts in output from 1 December despite Brent having broken through its US$75pb ‘floor’ [photo credit: Saudi Ministry of Commerce] As has been the case since October 2023, events underpinning this risk premium are the principal ‘known unknown’ in play. In the 26 April Newsletter immediately following the tit-for-tat strikes between Iran and Israel, I argued there was: …a non-negligible probability that [Israeli] hardliners will, in due course, pressure Israel’s prime minister into trying to neutralise Iran’s most important source of deterrence once and for all. By explicitly making the return of displaced residents to northern Israel a war aim, the Israeli cabinet seemingly took a major step in that direction last week. However, the possible timing of any major escalation remains far from clear. Indeed, that Israel’s crippling of Hezbollah’s communications was not followed up immediately by a major assault has caused some experts to speculate that an extension in the established pattern of the conflict is more likely than a land invasion. Furthermore, even if an invasion were to materialise it is not inevitable that Iran would get directly involved. And, even if it were to, this would not necessarily affect the flow of oil through the Strait of Hormuz. This being said, in April I did acknowledge that: Although even a major land invasion of Lebanon…would have no direct bearing on oil supply, a shift in market sentiment consequent to a marked escalation on Israel’s northern front could see sustained higher prices. However, the pattern since then has been that any politics-driven uptick in the price of crude has quickly faded. This suggests that it would now take a major disruption in supply to see Brent firmly back in its US$75-85pb range, let alone any higher. Turning to the dilemma with which OPEC+ is grappling, as Bloomberg’s commodities expert Javier Blas wrote on 5 September: …looking at the 2025 balance of supply and demand, OPEC+ is simply kicking the can down a very uphill road. In two months, the group will have to take another fateful decision. If it wants higher oil prices in 2025, it will have to do far more than delaying the almost 2 million barrels a day of extra production that it penciled in by the end of next year. It will need to cut output outright. Without curbing production, further price drops loom. This is consistent with the International Energy Agency’s (IEA) latest monthly Oil Market Report, the key points in which were as follows: Growth in global demand for oil continued to decelerate thanks principally to sustained contraction in consumption in China; Growth in demand through 2024 was forecast to be below one million barrels per day (bpd), taking total demand to an average of just short of 103mbpd; Growth in demand through 2025 was forecast to be only marginally higher; Output globally in August averaged 103.5mbpd despite disruption in Libya, Norway and Kazakhstan; and, Non-OPEC+ output is set to increase by 1.5mbpd this year and by the same through 2025. As the report concluded: …with non-OPEC+ supply rising faster than overall demand…OPEC+ may be staring at a substantial surplus, even if its extra curbs were to remain in place. Bloomberg’s Blas again: Tactically, OPEC+ is also sending the worst possible message to the market. First, the deal speaks about the gymnastics the group is doing to preserve unity…. Second, it's a belated admission the market doesn't need the oil the group had anticipated…. And third, it doesn't address the surplus of the first half of 2025, which would continue to stoke bearish bets. As if Mr Blas’s second point were not bad enough, the cartel’s credibility is called further into question by the OPEC secretariat’s insistence in its 10 September Monthly Oil Market Report (MOMR) that global growth in demand this year would hit 2mbpd. This appears to be based principally on continuing bullishness over economic activity in China. However, that assessment is not shared either by the IEA or by the investment community at large which is increasingly minded that, in addition to sustained economic weakness, we may be seeing a structural shift in Chinese demand for oil underpinned by the increasing number of electric vehicles on the road and high speed rail eroding demand for air travel. What is clear is that it is not in OPEC+’s power to significantly change the market dynamic other than in the — in my view, unlikely — event that it agrees to a further sizeable and permanent cut in its total output, not only surrendering more market share but also seriously risking breaking up the cartel in the process. However, on 26 September the FT reported that, in an effort to protect its market share, Saudi Arabia is set to begin unwinding its voluntary cuts from 1 December by a minimum of 83,000bpd per month. Although what would amount to a major shift in policy by Riyadh has yet to be confirmed, the immediate downtick in the price of crude is confirmatory that, absent a major and sustained geopolitical shock, Brent crude now looks very likely to settle below US$70pb well into 2025. Members can leave comments about this newsletter on the Arab Digest website