The reason we are reluctant to revise upward our oil forecasts is mainly due to the increasing political pressure that OPEC+ is likely to face if prices continue to strengthen. Historically, OPEC has always said that its goal is to stabilize markets and that the group does not target certain price levels. Saudi Arabia’s energy minister repeated these comments at a conference in Canada this week. However, with a deficit of more than 2 million barrels per day and prices close to $100 per barrel, it is difficult for the group to make these claims when OPEC+ production is more than 3.5 million barrels per day below of target production levels.
Governments around the world are likely to become increasingly concerned about inflationary pressures due to strong oil and will therefore likely ask OPEC to open the taps a little more. Furthermore, next year there will be elections in two key oil-consuming countries – the United States and India – suggesting possible even greater pressure from these two governments.
OPEC+ will also want to be careful about tightening the oil market too much. They will be shooting themselves in the foot if they drive prices to levels where we start to see a greater risk of demand destruction. Demand growth in 2024 is already expected to slow to around 1 million barrels/d from around 2 million barrels/d this year due to expectations of weaker GDP growth. Higher oil prices could mean we see even more modest demand growth.
OPEC+ will continue to review supply cuts on a monthly basis, so it is very possible that we will see the group – or at least Saudi Arabia – gradually ease its additional voluntary cuts this year, which would help relieve some pressure on the market.
Unfortunately, the market will have to depend on OPEC+ measures. The lack of drilling activity in the US means we are seeing only modest supply growth from the US, and not enough to make up for the large projected shortfall. The US Energy Information Administration (EIA) forecasts that US crude oil production will grow by less than 70 Mbbls/d between August and the end of this year. It is difficult to imagine the US government tapping into its strategic petroleum reserves (SPR) after major reductions last year left SPRs at their lowest levels since 1983.