The author of this article is Dr. Cyril Widdershoven
After a prolonged period of high revenue streams and continuing optimism about oil demand growth, bears are ruling not only sentiment but also pushing oil market leaders under pressure. The last days’ negative sentiment has grown as global commodity traders and international financial institutions continue their doomsday statements. At Singapore’s APPEC (Asia Pacific Petroleum Conference) Week these days, commodity giants are voicing their negative sentiment again, indicating lower oil prices due to increased economic pressure in China and global instability, which is partly linked to Ukraine-Russia and Israel-Iran, but also growing worries about the outcome of the upcoming US Presidential Elections. Said volatility is back in the market, with expected sluggish demand growth and potential economic concerns.
All eyes are again on OPEC, as the oil market power players again look to oil producers, such as Saudi Arabia, UAE, Iran, or Russia, to save the day. Some see the latest OPEC(+) decision to extend the current production cuts agreement as a sign of weakness but should be taken on its merits. If OPEC had kept to former statements and would have increased its export volumes, oil prices would have crashed, potentially hitting $60 per barrel or less. For consumers, this would have been a godsend; even the industry would have been smiling, but in the long term, the negative repercussions would have been potentially disastrous. The current oil market situation is not extraordinary, as demand is still relatively strong, prices are still hovering at affordable levels, and an economic recession is not in sight.
The only real Black Swan hiding in plain sight is China; its economic growth is under severe pressure, and its financials are not showing any room for optimism. Beijing will not be the engine for global economic growth in the following years.
Some even expect China to become Asia’s Germany 2.0, showing signs of stagnation, while several vital economic sectors are only surviving due to the multi-billion support of the government. A potential housing crisis is imminent, while debt levels are sky-high.
At the same time, China is facing a potential economic war with not only the USA (especially when Donald Trump wins the elections) but also from Europe. A growing call to minimize Chinese economic influence in the West is growing, and sanctions and trade barriers are being discussed in the open. Any accurate anti-dumping measures against China will harm global oil markets, as Beijing has been the leading global hydrocarbon demand growth motor. At the same time, geopolitical risks and internal disturbances have had a partly price mitigating effect, as risks kept prices reasonably stable. In contrast, production constraints in leading OPEC countries, such as Libya, and the impact of severe weather occurrences, such as the Asian and Gulf of Mexico hurricanes, mitigated demand fears.
As traders indicate, the oil market is expected to be well supplied in the coming months. The latter will significantly impact OPEC’s strategy for 2024-2025. A bearish outlook seems to give OPEC only two options. The first and most obvious one is to continue with their strategy to manage supply to prop up overall prices. However, this seems already very costly, as OPEC production cuts open room for non-OPEC producers to take market share. The other option for OPEC is to return to a formerly well-used strategy, to open up the taps to push out non-OPEC producers. A return to a more aggressive approach seems to be on the minds of some members already. Lower prices will push out some non-OPEC producers, especially unconventional oil in the USA or deepwater production. Until now, lower oil prices have not yet been the target for OPEC, as the majority officially still supports the market stabilization approach. However, most OPEC producers, or its compatriots OPEC+ members, such as Russia, are increasingly unhappy with lower revenues and long-term market share decline. No accurate indicator for a market-share war is seen, but for 2025, the latter is no longer a no-go area.
OPEC’s leading producers, especially Saudi Arabia, feel the negative impact of lower oil prices and potential demand constraints. Even though OPEC is still pushing its narrative of continuing demand growth, the group had to revise its current figures downwards. In its last monthly report, OPEC brought its growth estimates down by 130,000bpd to 2.11 million bpd for 2024. The group, however, kept its expectations for 2025 in place, even though China’s demand at present has been down for the first seven months of 2024 by 2.4% YoY. Current figures are not better, so pressure is still on. In the last few days, OPEC stated that its crude oil output decreased by 170,000 bpd to 40.9 million bpd in August 2024. At the same time, the OPEC+ members decreased by 60,000 bpd to 34.14 million bpd. Remember that most of OPEC+’s lower oil production figures of OPEC+ were caused by Libya and Kazakhstan, which are not very stable producers.
Predictions are all over the place, but leading financial institutions are all getting very bearish. At the same time, with global oil benchmark Brent crude futures settling for the lowest levels since December 2021, it is clear that oil producers are fighting an uphill battle. The remarks by OPEC in its latest Monthly Report, September 2024, were less optimistic. The oil group revised its oil demand forecast for 2024 to 2.03 million bpd growth, which is 80,000 bpd less than before. The market has been spoked, as OPEC has kept its forecast unchanged since July 2023. It also has lowered its 2025 forecast from 1.78 million bpd growth to 1.74 million bpd. The more negative views even held by OPEC now support the overall market’s bearish sentiments of weakened demand growth and possible oil oversupply in 2025.
Another oil market bull, the US Energy Information Agency (EIA), stated a diffuse message. The EIA indicated a record oil demand in 2024, but growth will be lower than expected. In its report, the EIA expects global demand to hit 103.1 million bpd in 2024, which is 200,000 bpd higher than its previous forecast. OPEC and the EIA agree that the Asian market, mainly China-linked, is in trouble. Even though official Chinese reports this week indicated the highest export growth in 1.5 years, import levels show a deep depression. The latter is also seen in the fragile refining margins in Asia, which have had the lowest since 2020, as the supply of diesel and gasoline has increased. Oil analysts are seeing no real oil demand growth in advanced economies in 2024, and China’s current housing crisis is part of the latter.
While oil market volatility is part of the game, some even say it is necessary to make real money, the future looks bleak for OPEC producers to generate enough cash long-term.
After decades of being a rentier state, leading OPEC producers are confronted by lower oil revenues and higher investment needs.
Not only is more revenue needed to continue production levels at the same level or even expand existing production capacity long-term, but countries such as Saudi Arabia are also going through a very costly economic diversification process. Without taking again a position on the so-called break-even price of oil producers, which is partly not very functional in light of their revenue base, the overall financial position of respective sovereign wealth funds, and the flexibility of their local labor markets, Saudi Arabia, but also the UAE, Iran, Iraq or even Qatar, are looking at immense investment needs. In contrast, oil (and natural gas) revenues are lower than expected for a prolonged time.
In its latest report, the International Monetary Fund (IMF) warned that OPEC’s largest producer, Saudi Arabia, is facing an uphill battle to counter investment requirements after 2026. In its yearly consultation, the IMF indicated that Saudi oil revenues will decline faster than expected after 2026, primarily until the end of this decade. The IMF report noted that Saudi oil revenues will increase to SR789 billion ($209 billion), or around 26% of GDP in 2026. Still, it will be dipped to SR778 billion in 2029, which is 4.1% lower than estimated. Action is needed, as the Kingdom is still very dependent on hydrocarbon revenues. The IMF report is still slightly optimistic, as it expects Saudi’s oil production to be 9 million barrels a day this year, rising to 10.2 million in 2026 and 11 million in 2029. However, The assessment is partly outdated already, as the IMF expects the kingdom’s average export price to be at $82.5 per barrel in 2024, dropping to $70 by the end of the decade. At present, prices are already hovering below the mentioned price levels. Without any action to prop up prices and increased volumes, the financials of the Kingdom will be hit. With lower crude prices, the profits of the Kingdom’s money maker Aramco will also be much less. Remember, the Saudi government depends heavily on the massive dividend it gets from 81% ownership of the state-run Saudi Aramco. Without possible dividends at 2023-2024 levels, which are $124 billion this year, the overall fiscal deficit of the Kingdom will increase, maybe even double.
Hard choices have to be made very soon. OPEC’s current course is no longer functional, as market forces outside the control of OPEC’s leaders are setting the scene.
At the same time, most OPEC Arab leaders and OPEC+ leader Russia have linked their future to China and India. The latter two are not showing any real growth, even though India is trying to push forward. China’s detrimental situation, however, is already since 2020 not changing at all. Government intervention and support are not having the desired results, while Arab oil and gas producers are still investing heavily in the sluggish economies. Riyadh, and maybe even Abu Dhabi and Doha, will need to reassess their options. The Asian Tigers have been weakened; their economic growth figures are no more impressive.
Without healthy growth in Asia, for most Arab countries and China, demand growth is expected to slow down. At the same time, non-OPEC producers are increasing production, as shown in Latin America and Africa. US oil production is again hitting record levels, so there is no relief for OPEC on the horizon. In the long term, Saudi Arabia, UAE, and others will be regaining their position, as they are still the actual low-cost producers of the world. However, optimism in 2035 doesn’t pay the bills in 2025. Economic diversification is needed, but the money will become more costly. Most Giga Projects or other national dreams are showing delays or cutbacks. It seems that OPEC countries didn’t read the books on Dutch Disease or even Giacomo Luciani’s Rentier State. It is time to wake up; if not, reality will bleak more than expected.
Volatility is back, and OPEC will be critical in stability or instability; the choice is theirs. Regional instability is also still to be dealt with, as the Israel-Gaza-Hezbollah war is far from over, while Iran and Russia are putting oil on all fires. In contrast to most oil market analysts, declining prices are unsuitable for energy and industry. Investments and clarity are needed; both are hidden behind dark clouds and bearish sentiments. OPEC, not OPEC+, should make rational choices. Russia is not a partner but a destabilizing factor, but OPEC members seem to be in love with Putin’s behavior. Moscow’s strategy is not to strengthen or stabilize energy markets. Putin’s only chess play is bringing money to keep his regime in place. At the same time, China is not interested in stability but only in increasing its global footprint while receiving discounter hydrocarbon volumes. The Asian pivot of OPEC members is part of the current problem in the market. Riyadh-Abu Dhabi should reassess its position based on economic and strategic factors. OPEC is not a cartel or “Band of Brothers”; it is only a temporary alliance of “the willing.” In stark contrast to OPEC statements, geopolitics are part of the game. Non-OPEC producers seem more adapted to that power game than the Kings of Oil.
