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Weakening oil demand growth and higher-than-expected U.S. oil production may force OPEC and the OPEC+ group to make deeper cuts to production levels if they want to balance the market, Marco Dunand, chief executive at one of the world’s top trading firms, Mercuria, told Reuters on Wednesday.
“High U.S. (oil) production growth works well when Chinese demand is growing by 1 million bpd a year. But both Chinese and overall global demand are slowing and will probably grow by 1.5 million bpd this year,” Dunand told Reuters on the sidelines of the ongoing World Economic Forum in Davos, Switzerland.
Mercuria’s top executive expects lower global oil demand growth than OPEC, which said in its latest monthly report on Wednesday that demand is set to grow by 2.2 million bpd this year and by another “robust” 1.8 million bpd next year.
While the U.S. has surprised the market with higher-than-forecast oil supply growth last year, the current consolidation drive in the shale patch could slow growth, according to Mercuria’s Dunand.
“U.S. oil production growth was underestimated over the past year. But it will probably slow down because of huge industry consolidation and cost reduction,” he told Reuters.
On the demand side, slowing demand – if those expectations pan out – would put OPEC in a position to further support the market balance and prices with deeper cuts.
“The Saudis might need to go further with production cuts if they want to control the price,” Dunand told Reuters.
The oil supply and demand picture looks fairly balanced or in slight surplus this quarter, analysts say, and reckon a demand uptick in the second and third quarters would tighten the market and potentially push prices higher.
Much will depend on the OPEC+ supply policies. The alliance has announced additional production cuts for the first quarter of 2024. If the group decides to unwind those cuts, or part of them, after March, supply would be more than enough to meet growth in demand, considering that oil supply from non-OPEC+ producers – driven by the U.S., Brazil, and Canada – is also expected to continue rising.
Soaring supply from the United States and other non-OPEC+ oil producers could force OPEC+ to continue carefully managing its supply to the market for the next five years to prevent a collapse in oil prices, analysts at Rapidan Energy Group said last month.
By Charles Kennedy for Oilprice.com
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Charles is a writer for Oilprice.com