A fresh round of bearishness has clobbered the global oil market in a likely sign of things to come for the remainder of the year and the first half of 2025.
As of Friday, the global proxy oil benchmark Brent is down nearly 7% year-to-date and barely able to maintain a price floor above $70 per barrel. Overnight the Brent November or front-month contract fell 2.53% or $1.86 to $71.60, while the West Texas Intermediate ended 3% or $2.02 lower at $67.67. The U.S. benchmark is down 5% year-to-date as well.
The trigger for the latest slump happens to be a report in the Financial Times that Saudi Arabia was ready to abandon its unofficial “$100 price target to take back market share” and is committed to pressing ahead with production increases later this year.
The so-called price target is unofficial for a reason because it isn’t a target set in any sort of metaphorical stone at all. Every reasonable market commentator knows that there isn’t an oil producer in the world who wouldn’t crave a higher price. Albeit one that’s not so high that it may drive demand lower. In that respect, how can Saudis act differently?
The often touted figure of $100 in relation to the Saudis comes from modelling by domestic as well as international assessors on what oil price level Riyadh would need to balance its budget.
In May 2023, the International Monetary Fund (IMF) put it at $80.90. However, in April this year, it revised the Kingdom’s fiscal breakeven upwards by 19% to $96.20. That’s a level not far off from a $100 price which looks pretty unrealistic in current market conditions.
Bears Are Gonna Be Bearish
At present oil prices are at their lowest levels since 2021 largely down to uncertainty over global demand. Even the Organization of Petroleum Exporting Countries (OPEC) – considered to be among the more bullish demand forecasters out in the market – now expects lower demand growth both in 2024 and 2025.
As does the International Energy Agency (IEA), even though both continue to offer vastly divergent oil demand growth forecasts for 2024 of less than 1 million barrels per day (bpd) in the agency’s case, and over 2 million bpd in OPEC’s case.
Much of this is down to lackluster demand in China, the world’s leading importer and second-largest consumer of crude oil. With question marks over its economic growth, and stimulus measures taken by Beijing not of the magnitude of its actions in recent times, oil will continue to struggle.
The market saw 2023 end with an average demand level of 102 million bpd, a figure that included biofuels. Even if demand were to hit a level just above it come the end of this year, what has got the bears out with a vengeance is the fact that even the upper end of the projected demand growth can be comfortably met by non-OPEC production alone.
Led by the U.S., non-OPEC oil, especially light sweet crude, is on the market in ever greater volumes. Higher production in Brazil, Canada, Guyana and Norway along with that of the U.S. is more than making its presence felt, grabbing market share from OPEC producers.
As such there will likely be a supply surplus come the end of the year. So were the Saudis, and by default OPEC, to open their taps a bit further in the interest of protecting or expanding their market share, bearish sentiment will likely amplify. However, market fundamentals pointing to an oversupplied market have been clear for a while now.
Current price levels are indeed being influenced by robust non-OPEC, especially U.S., crude production too. But OPEC is as much to blame as it also likely erroneously tried, and failed, to hold oil prices at relatively higher levels for far too long – a recurring feature of its long and checkered history. This benefited low margin production plays and brought more crude on to the market to supplant OPEC’s own.
If now much lower oil prices beckon owing to a much delayed tussle over market share, current or even lower levels may become the order of the day for the final quarter of this year and the first quarter of the next before 2025’s summer crude demand possibly comes to the rescue.