Energy News Oil Wind

The Future of Oil Markets: Assessing the Impact of Saudi Arabia’s Production Cuts

Oil markets are on edge as they eagerly anticipate the upcoming OPEC+ meeting on November 26. The focus of the meeting will be Saudi Arabia’s decision on whether to extend its voluntary crude oil production cuts of 1 million bpd. Whatever path the kingdom chooses, its decision will undoubtedly shape the short-term future of global oil prices. Balancing the desire to keep prices high by limiting supply with the knowledge that it could result in a further drop in overall market share, Saudi Arabia faces a critical choice.

Recent weeks have seen significant downward pressure on crude prices, with a dramatic sell-off driven by oversupply concerns pushing prices below US$80 per barrel. This nosedive could be a precursor to the outcome of the OPEC meeting, as Saudi Arabia has consistently demonstrated its price floor above US$80 per barrel. As oil markets anxiously await the confirmation of production quotas for next year, attention will be focused on whether Saudi Arabia extends its voluntary cuts into 2024, gradually unwinds them, or lets them expire at the year’s end.

Regardless of the decision, Saudi Arabia’s choice will have far-reaching implications for oil markets and particularly the oil price in the coming year. Rystad Energy’s latest analysis indicates that if the voluntary cuts are not extended into 2024, a balanced market is expected for the first quarter, followed by a looming surplus of over 600,000 bpd in the second quarter. However, the second half of 2024 is projected to show a deficit of around 450,000 bpd, resulting in a relatively balanced oil market compared to the significant deficit experienced this year.

The projection presented by Rystad Energy deviates from previous expectations, reflecting a looser market than anticipated just weeks ago. Concerns over oversupply have mounted, with oil prices falling below US$80 per barrel in mid-November. Additionally, US commercial crude inventories have steadily increased, contributing to the bearish sentiment in oil markets. Despite strong demand indicators in terms of global mobility, worries on the macro side persist.

Rystad Energy has run five scenarios to estimate the impact of Saudi Arabia’s production policy on oil prices. If the voluntary cuts are not extended, market bearishness will likely prevail, with oil prices averaging slightly above US$80 per barrel next year. On the other extreme, if Saudi Arabia extends the cuts until April 2024 and gradually unwinds them, the average oil price for 2024 could reach US$96 per barrel. It is worth noting that the IMF estimates Saudi Arabia’s oil breakeven price to be US$86 per barrel.

Intriguingly, Rystad Energy’s analysis suggests that for Saudi Arabia to achieve its desired price level, it will need to continue sacrificing market share until at least June 2024. All eyes will be on Vienna next week as the OPEC+ meeting takes place and the world awaits Saudi Arabia’s next move.

Frequently Asked Questions (FAQ)

1. What is the OPEC+ meeting?

The OPEC+ meeting is a gathering of member countries from the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries. During this meeting, decisions regarding oil production levels and quotas are made to manage the global oil market.

2. What are voluntary crude oil production cuts?

Voluntary crude oil production cuts refer to a decision made by a country or group of countries to reduce their oil production levels voluntarily. This measure is often taken to stabilize or influence oil prices in response to market conditions.

3. What are the implications of Saudi Arabia’s decision on oil markets?

Saudi Arabia’s decision on whether to extend, unwind, or let expire its voluntary cuts will have a significant impact on the short-term future of global oil prices. It will shape the supply dynamics and potentially influence market sentiment, leading to either a balanced market or surplus/deficit conditions.

4. How does Rystad Energy’s analysis inform our understanding of the oil market?

Rystad Energy provides valuable insights through its analysis of different scenarios for Saudi Arabia’s production policy. By estimating the potential impact on oil prices, Rystad Energy contributes to the understanding of market dynamics and the factors that may shape future oil prices.

5. What are the projected oil market conditions for 2024?

Based on Rystad Energy’s analysis, the oil market in 2024 is expected to be relatively balanced compared to the significant deficit experienced in the current year. However, market conditions will depend on Saudi Arabia’s production choices and how they influence supply and demand dynamics.