(Bloomberg) -- Oil traders are divided over whether OPEC+ will proceed with plans to restore production in December, as crude prices falter amid a fragile economic outlook.
The alliance led by Saudi Arabia and Russia is due to begin a sequence of monthly output increases with a hike of 180,000 barrels a day in December, as it gradually revives supplies halted since 2022.
But the producers have already delayed the restart — originally scheduled for October — amid weakening oil demand and swelling rival production. With little sign of improvement, traders and analysts surveyed by Bloomberg are no more confident the cartel is ready to move now.
Sixteen of 30 survey respondents predicted that the Organization of Petroleum Exporting Countries and its partners will opt to delay the hike. The group will need to decide in the next couple of weeks, in time to notify customers.
Meanwhile, oil futures have slumped 18% since early July, ignoring conflict in the Middle East as demand frays in key consumer China and output climbs in the US, Brazil, Canada and Guyana. At about $72 a barrel in London, prices are too low for many OPEC+ members like Saudi Arabia to cover government spending.
“The biggest problem for oil demand is China,” said Henning Gloystein, head of energy and climate at consultants Eurasia Group. “This will put the Middle East-dominated producer club OPEC in a tricky position.”
Consumption in the Asian nation contracted for four straight months, causing global oil demand to grow at the slowest pace since the 2020 pandemic, the International Energy Agency estimates. Demand growth of roughly 1 million barrels a day — or about 1% — will be eclipsed by a supply surge of 1.5 million barrels next year, saddling world markets with a new glut, according to the IEA.
Lower Price Threat
Prices are headed into the $60s next year, and potentially lower if OPEC+ opens the taps, according to Citigroup Inc. and JPMorgan Chase & Co.
That poses a financial threat for Riyadh, which needs levels closer to $100 a barrel to cover the ambitious economic plans of Crown Prince Mohammed bin Salman, according to the International Monetary Fund. The kingdom’s oil-market partner, Russian President Vladimir Putin, seeks to finance his war against Ukraine.
Saudi Energy Minister Prince Abdulaziz bin Salman has often urged the group to be cautious in adding barrels back to the market. When OPEC+ deliberated the supply restart last month, traders’ expectations were similarly divided.
“Sentiment is weak and could take a further hit if OPEC+ go ahead with the increase,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen.
Still, the remaining 14 survey respondents predict the producers will go ahead with the December increment. World oil inventories have been depleted following summer driving demand in the US and elsewhere, they contend. And OPEC+ can’t postpone its roadmap for reviving output indefinitely, said one official who asked not to be identified.
“The market isn’t exactly super-tight, but it is snug,” said Jeff Currie, chief strategy officer for energy pathways at Carlyle Group. This gives “OPEC+ scope to bring back production on a data-dependent basis.”
US Election ‘Shockwave’
The market outlook the group faces ultimately hinges on the outcome of US presidential elections on Nov. 5, Currie added.
“The real geopolitical risk has yet to come, which is the shockwave from the US election,” he said. “Not only will it jar fragile flash points around the world, but it will also reveal the all-important path that Chinese stimulus takes in response.”
Separately, the United Arab Emirates, a key member, has often appeared eager to deploy new production capacity, which it says is significantly higher than current output levels. Abu Dhabi has secured a special arrangement to add some barrels regardless of whether the group-wide hikes proceed.
OPEC+ has agreed to restore a total of 2.2 million barrels per day of halted output in monthly tranches through to late 2025. Ministers will gather on Dec. 1 to consider the hikes scheduled for early next year.
Their policy could depend on the alliance’s least compliant members: Iraq and Kazakhstan.
OPEC’s leadership has pressured the two countries for failing to implement their share of cutbacks pledged at the start of the year. While they have shown some recent improvement, and promised extra curbs to compensate for overproducing, they’re still pumping above their designated quotas.
Riyadh could grow sufficiently frustrated with shouldering the burden that it opts to accelerate the time-table of supply increases, according to RBC Capital Markets LLC. But others suspect the group may wait for the laggards to fulfill their promised reductions first.
“I’d expect the market would want to see evidence of compensatory cuts before some supplies can be brought back,” said Aldo Spanjer, commodities strategist at BNP Paribas SA. “Returning before evidence of compensatory cuts might induce another sell off. Given that, I’d expect a roll over in December.”
--With assistance from Yongchang Chin.
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