Summary
- Global oil supply is set to increase by 0.9mn b/d in 2024.
- Non-OPEC members such as the US, Brazil, Canada, and Guyana will drive much of this increase.
- Within OPEC, we expect Nigeria and Iran to continue increasing supply this year.
- Finally, demand risks should prevent OPEC+ from unwinding its supply cuts.
Market Implications
- We expect Brent to settle around $85/ bbl by the end of Q1.
- The two risks we are watching for are upside surprises in US oil supply growth and OPEC+ possibly reversing its production cuts prematurely.
Non-OPEC Supply Growth to Rise by 1.3mn b/d
2023 was a year of surprises. Better than expected supply from sanctioned countries as well as both the US and Brazil likely drove the oil market into a surplus during the final quarter of the year.
This year, we see global oil supply rising by 0.9mn b/d following an increase of around 1.8mn b/d last year (Chart 1).
Non-OPEC production is set to rise by 1.3mn b/d, driving most of the increase. From OPEC, we expect production to decline by 0.5mn b/d as it struggles to release spare capacity back into the market given growth risks in Europe and China.
Supply Risk 1: US Oil Supply
While last year’s supply surprises came on multiple fronts, we see two main factors to focus on this year. The first is the trajectory of US oil supply.
Last year, US oil (i.e., crude, petroleum, and biofuels) production rose by more than 1.1mn b/d, and 0.3mn b/d higher than the most optimistic forecast (OPEC).
The increase was driven by a combination of productivity gains in the Permian, greater capex by private producers, and the reduction in drilled-but-uncompleted wells (DUCs).
This year, we expect an increase of 0.6mn b/d in total liquids and 0.3mn b/d of crude. We highlight that despite the impressive forecast, we do not see last quarter’s production level being eclipsed.
The main risk we highlight is that given the nature of last year’s supply beat, we believe supply risks are firmly skewed to the upside, especially if the price of WTI can sustainably trade above $80/bbl. In such a scenario, production growth could return to around 0.8-1mn b/d.
Supply Risk 2: Premature Unwind of OPEC+ Production Cuts
On OPEC risks, we highlight two factors:
- Elevated spare capacity and disunity within OPEC reduces the chance of further production cuts absent a global recession. I.e., OPEC is out of bullets.
- With Brent above $80/ bbl, the incentive for OPEC member states to comply with their quota will fall. For instance, we could see countries playing games around what is crude and condensate. Other issues include Iraq and Russia’s record of poor compliance.
Our base case is that despite the above risks, OPEC+ production cuts will remain in place for the whole of 2024 as global demand comes in lower, driven by Europe and China. We think oil needs to sustainably trade above $90/ bbl for unwinds to happen, which seems unlikely.
However, should OPEC look to prematurely unwind its production cuts, oil could fall to around $60/bbl this year.
While we see US production growth beating expectations as a bigger risk than an OPEC+ unwind, being laser-focused on both risks this year will be key.
Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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