Many in the oil market are already predicting a supply glut for the first half of 2025. That’s even after a decision by oil producers’ group OPEC+ to not increase its output by another three months.
Overnight, the International Energy Agency also joined the ranks of those predicting an oversupplied market in 2025, in latest market report. Its projection on demand growth next year is now in the range of 1.1 million barrels per day, an upward revision from the 990,000 bpd it predicted in an earlier update.
However, it also expects non-OPEC+ producers to increase their output by about 1.5 million bpd next year, driven by the U.S, Canada, Guyana, Brazil and Argentina. That exceeds the rate of global demand growth.
Most notably, an uptick in U.S. crude production has been known for quite some time with the country currently producing north of 13 million bpd. Much of this manifested itself in the shape of higher U.S. light sweet crude volumes on the global market this year.
But as 2025 approaches, the overall market will likely be in surplus, and may trigger bearish sentiment for much of the first half of the new year.
Hedging, Not Trump A Bigger Dilemma For OPEC+
With demand staying lackluster for H1 2025, OPEC+ has a problem in particular from higher U.S. production. Much has been made about the incoming presidency of Donald Trump and its positive impact on U.S. volumes.
It may provide a potential upside through less onerous regulations, speeding up of approvals for pipeline infrastructure, and of course, upping federal land leases for exploration. But however benign Trump may be for the industry, higher U.S. production in 2025 will largely be down to the spirit of private enterprise.
That’s because each time OPEC+ backs away from increasing production, financially savvy U.S. shale drillers, hedge their sale price protecting it at an acceptable level on a rolling 12-to-18-to-24-month-out basis.
In 2024 alone, this has gone from phased price guarantees of $85 per barrel, $80, $75 and now $70 using Brent prices as a benchmark. For high margin shale drillers, with production costs of around $40 per barrel, hedging was, is and will remain a critical business lifeline to stay in the game.
Furthermore, industry consolidation following a wave of mergers and acquisitions in the U.S. has strengthened the shale patch commercially. And the energy majors – who have become big stakeholders in the shale patch – are gearing up to hike their output too in the U.S. and beyond. For example, ExxonMobil recently announced a plan to ramp up volumes by 18% to 2030.
This complicates matters for OPEC+ in the face of unimpressive oil demand, especially from China, as noted by various global data aggregators. China alone is importing 300,000 bpd less as the end of Q4 2024 approaches, compared to Q4 2023.
In 2023, global oil demand growth was near 2 million bpd, a figure that will likely be halved when the data for 2024 is in. It is unlikely to fire up all that much in 2025 as the IEA notes, in the face of potential trade wars, a stronger dollar and a weaker global economy.
For now, by announcing a delay to the unwinding of its additional voluntary production cuts by another three months and extending the ramp-up period by nine months through September 2026, OPEC+ has mitigated an immediate slump.
But its moves, as noted, keep shale players in play while it suffers a decline in market share. With non-OPEC production growth expected to be greater than total global oil demand growth in 2025, the producers’ group is therefore in a ‘crude’ pickle.
Raising production to regain market share would weigh on prices quite dramatically. That is something OPEC+ has been unwilling to do despite sitting on a spare capacity of 6 million bpd, more than half of which is with Saudi Arabia.
It is had to see how OPEC+ can increase supply at all in 2025 if protecting prices remains its objective. Regardless of what it chooses to do next, oil market doesn’t appear to be bullish in any case.