Yesterday's sedate affair in price action from oil contracts is not quite a damning verdict on OPEC's decision to roll current cuts into April 2025, but it hails a period of reflection. Those that follow oil balances will be quick to point out that the market just became a little tighter, well at least for the first part of 2025. However, if the plan to then unwind the first of 2.2 million over the ensuing year and the balance beyond to two-years from now, the market has just been offered another reason to stow any thoughts of a sustained medium/long-term rally, given that the current state of the world remains in similar form. Frankly, there was little choice for OPEC+, it was speculated that Saudi Arabia had little interest in fighting for market share at the expense of price, which if true could only lead to yet another kicking of the can down the street. 

The trouble with such a hiatus in decision, is that the cartel leads with its chin a little. Not only does it have a burgeoning overcapacity, but it also harbours members that are all too willing to cheat and the market will be even more acute in scrutiny of malpractice. A new President Trump brings paradox in thinking as well. Expectation would have that US oil would be free flowing and that the current record production being seen from Uncle Sam will continue. But if Mr Trump's malevolence toward Iran and probably Venezuela sees actual enforcement of sanctions, oil price prediction is evens at best. The anxiety in long-term oil consideration can only mean that whatever feedstock or product is your fancy, expressions of bullish and bearishness has to oscillate to the front of the market and crowded trades will occur with outsize moves when positions are reversed. The OPEC+ decision has only made the future path of oil even more uneven, unpredictable and unattractive for the deposit of long-term monies.

Total Lack of Upside Catalysts

The most bullish anyone has been over the past two months is neutral. The latest peak was reached in October when Brent rallied slightly above $81/bbl. It started to drift from there and in the ensuing two months it has failed to clear the $75/bbl upside obstacle. On the downside, a bottom of around $70/bbl was found. The general narrative is that the market is stuck in its rather narrow range. While immediate developments might push it out of this range on the upside briefly the medium-term view remains rather pessimistic.

This ominous outlook might be deemed misplaced when one looks at the individual components of the underlying fundamental backdrop. Firstly, there are two disturbing wars on display close to oil-producing regions. Secondly, the central banker of oil has been doing everything in its power to tighten the oil balance and has taken nearly 6 mbpd of production off the market.

Thirdly, and this could be the most perplexing element of the current oil equation, global oil demand keeps rising. During the post-pandemic rebound, it reached a record high in 2023, which is exceeded this year, and further gains are pencilled in for 2025. Sure enough, forecasts on absolute numbers deviate significantly but the hard fact is that the world has never needed this much of the black stuff. When looking at the annual growth rate, one would find that it is not outrageously below the long-term average. The IEA, the more conservative forecaster, expects global consumption to rise by 1 mbpd next year against the 1.09 mbpd average in the past 28 years. The OPEC projection of 1.6 mbpd is meaningfully higher than the 1998-2025 mean of 1.14 mbpd.

These are ostensibly powerful factors that should support a more than sanguine view on prices. Yet, what is perceptible is that the market is reluctant to take them in its stride as illustrated by the lack of upside price potential and the $25/bbl decline in oil prices since September 2023. It raises two questions: why is the stubborn unwillingness to commit oneself to the upside and what change would trigger an unconditional reversal in sentiment?

To begin with, next year’s demand growth rates are convincingly under the long-term average when the demand destruction precipitated by the 2008 financial crisis and the health crisis are omitted from the formula. It shows that the consumption growth slows. The reason is obvious. It is open to debate how fast the transition from fossil fuel to renewables is taking place, but it is an irreversible process. The IEA’s latest World Energy Outlook released in October found that the share of oil in the total energy mix declined from 40% in 20210 to 39% in 2023 and further erosion is expected by 2030 (38%) and 2050 (30%). In the same time frame, the weight of electricity in the basket grew from 17% in 2010 to 20% in 2023 and will rise further to 23% and 32% in 2030 and 2050. The supply of renewable energy will have grown nearly sixfold between 2010 and 2050 with its share jumping from 8% to 33% during these 40 years. The other dominant reason for the limited upside bias is that there is abundant spare capacity available in case of unexpected supply disruptions to fall back on. The inadvertent depletion of global stocks is implausible.

As for the second question, support will only come from the demand side if prices fall first. It would make oil competitive compared to renewables, particularly solar and wind. The IEA believes that at these price levels newly installed, utility-scale solar PV and onshore wind capacity have lower generation costs than energy generated by using oil, gas or coal. But for that to happen, short-term pain needs to precede medium-term gain. As argued above, the supply side seems reassuring, yet one must not discount the decline rate of global oilfields, which is estimated to be in the range of 4.5%-6.7% with non-OPEC fields declining faster than OPEC fields. This, however, will be met by the ambitious growth in non-OPEC+ production in the immediate future ensuring an adequate oil balance and the resultant cap on oil prices for next year.

Overnight Pricing