Okay, high quality. The article title might be an over-exaggeration, however it certain acquired your consideration. In all seriousness, I’m seeing lots of people query whether or not or not the OPEC+ lower factor is an efficient factor, after which I see panic over the reported U.S. oil manufacturing figures, and I can’t kind quick sufficient to calm a few of these fears. So to be environment friendly, I’ll break this text into a number of elements.
U.S. oil manufacturing.
Provide & demand steadiness.
OPEC+ manufacturing lower.
The place are we headed?
U.S. oil manufacturing
That is the simplest one to cowl as a result of we’ve been doing it for manner too lengthy. EIA’s month-to-month oil manufacturing determine got here out and to everybody’s shock, it’s one other month of development. September U.S. oil manufacturing was reported at 13.236 million b/d. Nevertheless it’s all the time the issues within the finer particulars that you just have to concentrate to. The adjustment issue, which has all the time been a constant constructive for the reason that U.S. shale revolution started, got here in but once more at a unfavourable. At -168k b/d, implied U.S. oil manufacturing for September was 13.068 million b/d. Transfers to crude oil provide got here in at ~725k b/d or constant across the ~650 to ~750k b/d vary. (For more information on transfers to crude oil provide, please learn our U.S. oil production-specific article).
So, was U.S. oil manufacturing actually 13.236 million b/d? No, it was 13.068 million b/d. EIA was profitable in segmenting out the adjustment issue, however what it wasn’t profitable in (simply but) is differentiating what’s crude manufacturing and what’s not. As we wrote in our OMF, this can be resolved in March 2024 in EIA’s part 3 (of tackling the adjustment).
At 13.068 million b/d, U.S. oil manufacturing has already exceeded what we anticipated in the beginning of the 12 months (~12.9 million b/d). And our real-time U.S. oil manufacturing tracker, now we have ~13.2 million b/d for November.
For readers, what it’s best to readily count on is both EIA to point out a better U.S. oil manufacturing determine (greater than 13.2 million b/d) and present an identical unfavourable adjustment determine, or EIA might present ~13.2 million b/d and present an adjustment coming in at zero. Both manner, complete provides don’t change.
Now, is U.S. oil manufacturing stunning to the upside? Sure, however to the purpose that warrants OPEC+ to announce one other ~696k b/d lower? No, by no means (extra on this later).
Our forecast reveals U.S. oil manufacturing will steadily fall in H1 2024. Our estimate reveals U.S. oil manufacturing falling again to ~12.8 to ~12.9 million b/d earlier than rising to ~13.4 to ~13.5 million b/d by the top of 2024. After that we see manufacturing development hitting ~13.7 million b/d in late 2025 earlier than utterly stalling out. We’re ~500k b/d away from the everlasting plateau.
So whereas U.S. oil manufacturing on a marginal foundation impacts world provide & demand, it’s not the explanation OPEC+ wants to chop once more.
Provide & Demand Steadiness
Now provide & demand balances, what precisely went flawed that required the additional manufacturing lower from OPEC+?
First, world oil demand development is inferior to individuals suppose. IEA, infamous for its underestimation of world oil demand, could lastly be overestimating world oil demand this 12 months. IEA anticipated world oil demand to climb ~2.4 million b/d this 12 months, however as we defined in our WCTW, “Swing Purchaser vs Swing Producer.” China’s oil demand, which is anticipated to extend by 1.778 million b/d or almost ~74% of world oil demand development this 12 months, is ~400k b/d overstated.
India, which is marginally rising this 12 months vs 2022, can also be not rising sufficient to maneuver the needle. Different nations within the non-OECD don’t present sufficient visibility to precisely gauge demand.
As for OECD, 2023 demand was no higher than 2022, so this leaves one other black eye on the demand image.
In mixture, demand development this 12 months was nearer to ~1.5 to ~1.7 million b/d versus IEA’s ~2.4 million b/d.
Now you couple that with IEA’s estimate of non-OPEC+ manufacturing development of ~1.7 million b/d (crude + NGL) and Iran pushing greater manufacturing by ~600k b/d, you get a state of affairs the place the oil market could be in oversupply if it wasn’t for the Saudi’s voluntary manufacturing lower.
And for those who take a look at complete observable oil inventories, you possibly can see that it’s flat y-o-y.
In conclusion, that is what occurred:
Demand is ~700k b/d to ~900k b/d under what IEA is estimating.
Provide-side surprises from Iran (+600k b/d), the US (+250k b/d), and Brazil (+100k b/d) have pushed the overall provide aspect greater by 950k b/d.
To offset the provision aspect shock, Saudi’s 1 million b/d voluntary lower does the job, however the demand aspect shock would require others to step in.
OPEC+ Manufacturing Reduce
Saudi labored its magic but once more. Due to Z4 Power Analysis on Twitter, right here’s the compiled desk for the Q1 voluntary cuts.
Supply: Z4 Power Analysis.
As you possibly can see, Iraq, UAE, and Kuwait will contribute a complete lower of ~521k b/d. That is in step with what we anticipated in our OPEC+ article. As for the opposite producers, we predict Oman can be good for the ~42k b/d it dedicated. Algeria’s ~51k b/d is questionable alongside Kazakhstan’s ~82k b/d. Russia has additional dedicated to a different ~200k b/d lower on gasoline oil exports, however we might query the compliance price on that.
In mixture, I believe the market ought to successfully worth in Saudi, UAE, Kuwait, and Oman. This leaves it with an efficient lower of 1.34 million b/d.
Now I’m not saying Russia or the others received’t lower, however the compliance price received’t be 100% just like the 4 producers we talked about beforehand. So the market has each proper to be skittish about these.
Assuming some stage of dishonest, we predict an efficient lower of ~1.5 million b/d is sensible, and if that is achieved, Q1 2024 balances ought to flip right into a small deficit. This will even be depending on climate, which can play a giant position in heating demand.
The place are we headed?
Rewinding to the title of this text, oil bulls appear to be questioning their very personal existence. How can this be an oil bull market if OPEC+ has to maintain chopping?
The query is a sound one, and I level you to demand. In any sustained oil bull market, demand must be a key driver. Whereas lagging provide is a crucial variable, rising demand is way extra vital. The outlook for 2024 will primarily be boiled down to at least one easy query once more, what does demand seem like?
And for the second, the reply will not be a snug one. Europe is already in recession, and elevated rates of interest mixed with a slowing U.S. economic system implies that recession is coming close to as properly. Whereas China is now beginning to stimulate its economic system and copper costs are displaying indicators of life, it’s nonetheless too early to say that demand might shock to the upside. The tip result’s that nobody is aware of what demand will seem like, and so in flip, the uncertainty is pushing lots of people away from investing in vitality shares.
However by way of oil market steadiness, we see 2024 as a constructive one. U.S. oil manufacturing, whereas it did shock to the upside this 12 months, is anticipated to stall in 2024 with average development. Non-OPEC development is anticipated to gradual to ~700k b/d, and there received’t be one other Iran to leap in with a +600k b/d shock. For OPEC+, H2 2024 will present ample room to unwind the voluntary cuts they’ve dedicated to. We see the Saudis unwinding the lower utterly by the top of 2024 assuming no less than 1.1 million b/d of demand development.
In mixture, we see a pathway ahead. Oil worth (CL1:COM) volatility ought to stay subdued (relative to historic requirements). We see WTI averaging within the $80s all through 2024 and Brent within the mid-$80s. We don’t see a state of affairs simply but the place oil costs eclipse the $90s for a sustained time period and make a transfer to $100. Provided that demand surprises to the upside will we see costs spike, however even in that state of affairs, China will flex its muscle mass because the swing purchaser.
In consequence, readers ought to count on a spread certain market. For vitality equities, steady costs within the $80s will current a good time to maintain paying down debt and reward shareholders (dividends & share buybacks). We predict it’s best to stay invested and add to your favourite names on weak spot.
So no, you shouldn’t query your existence, and deal with what you possibly can deal with.