The weekly Commitment of Traders reports from the CFTC and ICE tell us how hungry financial investors were for risk in the recent past. It is not exactly forward looking but the day’s price action is usually a good indicator if this risk is palatable.  Yesterday, the toppling of the Syrian regime and the possible loosening of Chinese monetary policy allowed market players to be adventurous and consume more risk. Every contract rallied, notwithstanding the considerable cheapening of Saudi January official selling prices to Asia and Europe, which does not exactly portend an impending supply deficit.

The removal of Assad’s regime in Syria probably raises more questions than answers and as such leads to increased anxiety in the region. Israel was swift to capitalize on the surprise demise of Syria’s long-term tyrant and carried out several air strikes on alleged chemical weapon and missile sites – much to the outrage of Egypt. The inability or unwillingness of Syria’s staunch allies, Russia and Iran, to rush to the aid of the fallen despot is a sure sign of the difficulties these countries face closer to home, in Ukraine and in Iran itself. The prospering future of Syria is anything but guaranteed and if one considers that the victorious rebel group is the offspring of al-Qaeda and is branded a terrorist organization by the United Nations then a peaceful transition might remain what it has always been, wishful thinking.

Yet, uncertainty led to short-covering and tentative bulls were further emboldened by the remarks from the Chinese Politburo that the country will adopt an ‘appropriately loose’ monetary policy coupled with proactive fiscal policy next year. Of course, the devil is in the details and these details are sketchy, so far. The economy will only be stimulated by improving consumer sentiment and spending, by a rise in domestic aggregate demand echoed in a healthy increase in consumer inflation. The first annual rise in November Chinese crude oil imports was more of a function of stockpiling than demand improvement. Exports grew at a slower pace whilst total imports contracted insinuating strong headwinds. Further strength cannot be ruled out in the immediate future. Still, without a discernible improvement in the underlying oil balance, it will be a strenuous process to sustain the current rally.

Tightening the Oil Balance in 1Q

Last week we saw a reasonable chance of OPEC+ sticking to the previously announced plan and gradually unwinding the voluntary production constraints of 2.2 mbpd starting in January throughout the end of 2025, effectively adding an extra 180,000 bpd of oil to the market every month next year. The rationale behind the thinking stood on two legs: recent extensions of the production cuts have failed to support oil prices and the alliance’s patience of relinquishing part of their share of the supply market would not be perpetual. The idea of easing cuts proved a semi-egregious oversight. The decision to keep restraints in place last Thursday was, according to the post-meeting press release, brought to ‘reinforce the precautionary efforts of OPEC+ countries, aiming to support the stability and balance of oil markets’. On the sidelines of a recent industry event, a seasoned oil trader pondered whether the move to keep oil off the market was the result of the re-election of Donald Trump with all the possible consequences of tightening the Iranian sanction screw, which, in turn, would make any future tapering of supply restrictions more affordable and justified.

Whatever the case, the result has made the fundamental backdrop more price-supportive than before the December meeting. Its impact can and ought to be quantified in order to establish a view of how the oil balance is affected. As the latest snapshot implies, it will be most acutely felt in the first quarter of 2025. The voluntary cuts of 2.2 mbpd implemented in March 2023 will be extended until the end of March 2025 as opposed to the end of the current year. Additionally, the gradual phase-out will take 18 months and will have run its course by September 2026. In other words, the monthly volume re-added will be 122,000 bpd per month and not the 183,000 bpd originally planned. Since the start date was pushed out by three months, the first quarter of next year, on average, will have to deal with 366,000 bpd less oil than planned before the ministerial meeting. There is an understandable and customary caveat, which states that the monthly increase can be paused or reversed if market conditions warrant it.

This week will see the releases of the updates on oil balance estimates from the three major forecasters: the EIA this afternoon, OPEC tomorrow and the IEA on Thursday. It is premature to speculate on the potential impact of the incoming Trump administration on the global economy and oil demand. However, Chinese efforts to revive its ailing economy through assorted stimuli might be acknowledged. On the supply side, OPEC does not provide estimates for the OPEC+ group’s future production, but the EIA and the IEA do, and last week’s decision will most probably be accounted for.

The diverging demand prospects of OPEC and the IEA have been widely publicized and extensively discussed. Last month, the producer group estimated 1Q 2025 demand at 104.30 mbpd, significantly higher than the IEA. Taking into account the projected non-DoC production the call for OPEC+ oil deviated by 1.2 mbpd and the resultant estimates on OECD stocks by over 100 million bbls. Regardless of which set of numbers will turn out more accurate, the predicted supply excess needs to be narrowed down and OECD stock level estimates must be downgraded – simply because OPEC will supply 360,000 bpd less oil in 1Q than previously calculated if it adheres to the new plan.

The first quarter of the year is usually and seasonally weak from the demand perspective. Our latest calculation, which assumed increased OPEC+ output from January, projected a price drop well under $70/bbl basis Brent, approaching the $60/bbl level, if not in 1Q then in the ensuing quarter. After last week’s decision, this view has to be amended and a protracted fall under $70/bbl might be a big ask – unless compliance remains loose. Judging by past performances, it is a possibility. In September, the two most disobedient members, Iraq and Kazakhstan, pumped 215,000 bpd over their combined allocations. (The Kazakh output dropped significantly in October due to the maintenance of the giant Kashagan field.) Lax conformity can neutralize the positive impact of the roll-over of the cuts. And so can the prevailing market view on ample spare capacity, which more than mitigates the impact of the extended supply cuts. Last week’s OPEC+ decision, if adhered to, might prevent oil prices from falling towards $60/bbl but it will not provide a sound base for a prolonged move over $80/bbl – unless demand improves appreciably.

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