OIL MARKET: Pressure Among OPEC+ Member Mounting?

OPEC+ has decided to delay any increase in oil production until April, extending the current reductions across its member countries. This move, aimed at stabilizing oil prices, may not achieve its intended effect. By constricting supply, OPEC+ risks losing market share to non-OPEC producers, particularly those in the United States.Indicative of this shift, the U.S. oil rig count, often seen as a barometer for the industry’s health and activity, rose by 5 last week, totalling 482. Concurrently, U.S. crude oil production surged to a record high of 13.513 million barrels per day, underscoring the increasing output capacity of non-OPEC countries and the complex dynamics at play in the global oil market.”Bank of America oil analsysts expect non-OPEC supply growth to take a ~75% share of the world’s global demand growth into 2030. In other words, only ~20% of OPEC+ spare capacity may be called upon this decade,” OPEC+, led primarily by Saudi Arabia, has continued its production cuts into 2025 to bolster oil prices. Despite these efforts, Brent crude prices have fallen over 12% from their peak in April, prompting the cartel to delay production increases twice this year due to softening global demand.The central issue remains sluggish oil demand, often called the sector’s “critical vulnerability.” Looking ahead to 2025, oil demand growth is projected to fall below one million barrels per day, primarily due to decreased demand from China and a broader slowdown in global economic growth.Compounding OPEC+’s challenges, non-OPEC countries, particularly the United States, have intensified the competition. U.S. oil producers have been setting production records, with 2024 seeing monthly outputs at all-time highs. This increase from non-OPEC producers is capturing significant market share and undermining OPEC+’s efforts to control supply and stabilize or increase global oil prices.The internal dynamics within OPEC+ are further complicating the cartel’s efforts to stabilize oil prices. As the prolonged period of lower oil prices strains national budgets, some member states have deviated from the agreed production quotas. This overproduction, driven by the need to address fiscal deficits, undermines the collective discipline necessary to maintain control over global oil supply and, by extension, prices.Global oil demand dynamics are under intense scrutiny, especially considering the ongoing pressures within OPEC. This situation is notably distinct from typical scenarios that arise during world recessions. One significant factor is China, where there seems to be no short to medium-term relief expected for oil demand growth. Despite potential economic recovery, China’s growth rates are unlikely to soar past 5% again soon. Moreover, the sustained high level of Battery Electric Vehicles (BEV) and Plug-in Hybrid Electric Vehicles (PHEV) sales, which have exceeded 50% over the last five months, is projected to diminish Chinese oil demand by 2026 significantly—regardless of GDP growth.A few years ago, China was driving 70% of global oil demand growth; now, that figure has plummeted to just 10-15%. The impact of these BEV sales is cumulative and burgeoning, pointing to a seismic shift in global energy consumption patterns.The cohesion within OPEC could be tested further as member countries grapple with a strategic conundrum: increasing output capacity to secure a larger quota can lead to a ‘prisoner’s dilemma‘’ suggesting not all can succeed simultaneously. This may prompt some members to exit OPEC. Saudi Arabia, in a bid to maintain order and discipline, might threaten to boost production dramatically to keep members in line. However, the effectiveness of such a strategy remains to be seen in this evolving context.If OPEC were to fragment under these pressures, the implications could be widespread. Notably, Russia, which heavily relies on oil sales to fund its military endeavours, including the Ukraine invasion, could find its economic position severely weakened. This potential unravelling of OPEC could be viewed favourably by many who see an opportunity to reshape global oil dynamics and its consequent challenges to major players like Russia.More By This Author:The Weekender: US Equity Markets Shine As Shoppers Steal The Spotlight
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