【MACRO Alert】OPEC+ Production Increase and Global Demand Uncertainty - Shortage and Surplus

The latest data from the International Energy Agency (IEA) suggests that the global oil market may experience a shift in the next quarter, moving from a supply shortage to a surplus. This forecast is based on OPEC+ continuing its plan to increase supply. Although current oil inventories are declining due to peak summer driving demand, the IEA expects this trend to stabilize in the fourth quarter. OPEC+, led by Saudi Arabia and Russia, has proposed a plan to restore production of about 543,000 barrels per day (b/d) starting in the fourth quarter.

However, the implementation of this plan may be paused or reversed depending on market conditions, with decisions expected to be made in the coming weeks. In the meantime, crude oil prices have fluctuated due to the summer driving peak and concerns over geopolitical tensions in the Middle East, with Brent crude futures trading near $80 per barrel. The IEA report points out that despite a significant slowdown in China's oil demand growth, OPEC+ has not stopped its plan to gradually cancel voluntary production cuts. Moreover, demand growth in developed economies like the United States has unusually compensated for the lack of demand in other emerging countries. The U.S. economy consumes one-third of the world's gasoline, and the resilience of its service industry supports vehicle mileage.

The IEA forecasts that even if OPEC+ cancels its planned production increase, global inventories will accumulate at a rate of 860,000 barrels per day next year, due to a surge in supply from the United States, Guyana, and Brazil. This prospect has led to a divergence of opinions among traders and analysts on whether OPEC+ will continue to increase production, especially considering that many member countries need higher crude oil prices to cover domestic fiscal expenditures.

In this context, OPEC has revised down its global oil demand forecasts for this year and next. According to its latest monthly report, the organization has reduced its 2024 global oil demand growth forecast by 135,000 b/d. Although this adjustment reflects a weakening of expectations for demand growth in Asia, OPEC still expects global oil consumption to grow at a healthy rate of 2.1 million b/d this year, averaging 104.3 million b/d. It is worth noting that OPEC's forecast remains higher than the expectations of many major trading companies and Wall Street banks, as well as the estimates of the International Energy Agency (IEA).

OPEC+ has been restricting production for nearly two years to offset the threat of oversupply in the Americas. The alliance plans to restore about 543,000 b/d of production in the fourth quarter as the first step towards increasing daily production by 2.2 million barrels by the end of 2025. Although OPEC's reports and forecasts provide market insights, its policies sometimes do not align with forecasts, and the accuracy of its predictions is sometimes questioned. For example, at the end of last year, the organization announced an increase in production cuts, but the record inventory tightening it showed did not materialize.

However, the future direction of the global oil market will be influenced by various factors, including OPEC+'s supply decisions, global demand dynamics, and the development of geopolitical tensions. As market participants closely watch the key decisions to be made, the uncertainty in the global oil market remains. The recent global oil market is facing multiple challenges and uncertainties. Data shows that the pace of global oil demand growth has not met expectations, which poses a challenge to OPEC+'s plan to increase oil supply from October.

Analysts point out that if global economic growth continues to slow down, oil demand growth may also slow down. In this case, OPEC+ may face a tough choice: either postpone its production increase plan or accept a possible decline in oil prices. The determination of OPEC+ to increase production as planned in October is to be observed, so it is necessary to keep the option of pausing or reversing the plan according to market conditions, against the backdrop of intensifying economic recession risks.

However, there is a significant divergence between OPEC and the IEA in terms of oil demand forecasts. OPEC expects global demand growth of 2.15 million b/d in the first half of 2024, while the IEA's forecast is only 735,000 b/d. Top U.S. refiners are slowing down the operation of their facilities, which not only reflects the challenges of stagnant consumption and shrinking profit margins but also exacerbates concerns about a global crude oil supply surplus. For example, Marathon Petroleum, the largest U.S. refiner, plans to keep the average operating rate of its 13 plants around 90% this quarter, the lowest level for this period since 2020. The slowdown in U.S. fuel production, coupled with demand uncertainty in other parts of the world, increases the risk of a crude oil supply surplus.

Despite OPEC+'s production cuts, the increase in oil prices this year has been limited to about 7%. The IEA expects global fuel producers to increase crude oil processing this year, but the actual situation may be contrary. The profit margin from crude oil to fuel is shrinking because of the mismatch in the timing of refinery closures, transformations, and new capacity additions, and the increasing popularity of electric vehicles and heavy trucks fueled by liquefied natural gas in China, the world's largest oil importer.

In addition, even with new refineries coming on line, global crude oil supply is expected to increase before the end of the year. The United States has successfully shipped some excess crude oil to Nigeria's Dangote mega refinery, and Mexico's Dos Bocas refinery is scheduled to start production this year. According to data from Bloomberg New Energy Finance, between 2023 and 2030, the world is expected to add about 4.9 million barrels per day of net fuel capacity.

However, this relief may be short-lived, as Guyana is increasing crude oil production, and OPEC and its allies plan to restore a daily production of about 540,000 barrels in the fourth quarter. With shale oil producers producing crude oil from wells drilled earlier this year, additional supply will be put on the market. It is expected that the United States' daily production will reach a record 13.8 million barrels this year, an increase of about 600,000 barrels compared to the same period last year. Supply may exceed demand, which will reduce the premium on crude oil prices due to geopolitical risks.

In summary, OPEC+'s production decisions, adjustments in the U.S. refining industry, and global economic uncertainties are jointly shaping the balance of supply and demand in the oil market. Market participants need to closely monitor these dynamics to make wise investment and operational decisions. Analysts expect that if demand growth does not accelerate, OPEC+ may have to reconsider its production increase plan. At the same time, the operational adjustments of U.S. refiners and the development of the global economic situation will continue to affect oil prices and market expectations.