Surging non-OPEC+ oil production and significant storage space held by the OPEC+ group will continue to put downward pressure on crude oil prices next year, analysts say.
Barring a major geopolitical escalation resulting in a large supply outage—which cannot be discounted—, oil prices are unlikely to reach $100 a barrel in 2024 as American oil production and exports are rising faster and higher than expected, and market sentiment about demand is downbeat, especially for the first half of 2024.
With its latest announced cuts for the first quarter of 2024, the OPEC+ alliance is trying to keep tight control over the global oil supply. But the group faces record-breaking U.S. oil production and rising supply from other non-OPEC+ producers, including Brazil, Guyana, Canada, and Norway. Brazil has been invited to be part of OPEC+ starting in January 2024, but it has already said that it would not take part in any production cuts.
OPEC+ is trying to keep a floor under oil prices (at the expense of its market share), but it may not succeed in propping up prices too much. This is especially true if the group fails to extend the cuts beyond March 2024, analysts say.
The group's production cuts "help defend a floor in oil prices, but more cuts equate to more spare capacity," Stacey Morris, head of energy research with VettaFi, told MarketWatch.
"That dynamic arguably puts a lid on the upside for oil prices," Morris added.
Warren Patterson, Head of Commodities strategy at ING, wrote in a note earlier this month that "given the scale of cuts we are seeing, OPEC is sitting on a substantial amount of spare capacity."
OPEC, including Iran, has some 5.5 million barrels per day (bpd) of spare capacity, according to ING.
"This spare capacity should also offer some comfort to markets given that should we see significant price strength, one would expect this capacity to start to return to the market," Patterson said.
At any rate, the oil market management from OPEC+ would be key to where prices will go next year, he noted. Related: Santa Getting Boost From Lower Gasoline Prices
ING sees Brent Crude trading in the low $80s early next year, while it forecasts Brent to average $91 per barrel over the second half of 2024, when the market will return to deficit.
However, non-OPEC+ supply is growing at a faster pace than previously forecast, led by record U.S. crude oil production, which continued to soar despite a flat or falling rig count compared to this time last year.
The United States is "now the global swing producer, not Saudi Arabia, and especially not Russia," Robert Yawger, executive director for energy futures at Mizuho Securities USA, told MarketWatch's Myra Saefong.
The United States is now on track to deliver a supply increase of 1.4 million bpd 2023, accounting for two-thirds of the 2.2 4 million bpd non-OPEC+ production growth this year, the International Energy Agency (IEA) said in its monthly report this week.
At the same time, OPEC+ production is set for a 400,000 bpd decline, which would reduce its market share to 51% in 2023 – the lowest since the bloc's creation in 2016, the agency added.
Record-high U.S. oil production is a "huge problem" for OPEC+, Paul Sankey at Sankey Research told CNBC after the latest OPEC+ meeting at the end of November.
The solution for Saudi Arabia could be to just flush the soaring non-OPEC+ output out by flooding the market with crude and thus sinking oil prices to levels below the U.S. profitability threshold, Sankey said.
If OPEC+ were to unwind the cuts after March 2024, oil prices could crash by 30%-50% if most of the spare capacity comes online, Citigroup's global head of commodities research, Max Layton, told Bloomberg TV this week.
"They can balance this market and keep these prices at $70 to $80 if they all work together," Layton said.
If OPEC+ producers continue to work together and not choose to flood the market with oil to flush out the U.S. competition eating into their market share, they may have to continue a tight control on supply for the next few years, according to Rapidan Energy Group.
"For the next several years, at least, continually unified, vigilant, and effective OPEC+ supply management will be required to prevent a collapse in oil prices," Rapidan said in a report this week carried by Bloomberg.
"While oil demand isn't about to peak, neither is non-OPEC+ supply growth,"
Bob McNally, Rapidan's founder and a former White House official, said.
"So OPEC+ has its work cut out for it over the next few years. But toward the end of the decade, a price boom will follow the bust. Buckle up."
By Tsvetana Paraskova for Oilprice.com
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