【MACRO Alert】OPEC+ Faces the Test of Oil Price Stability, Seasonal Factors and Supply Considerations Will Determine Future Direction

After abandoning the pursuit of a $100 per barrel oil price target, OPEC+ is currently facing new challenges as the market is testing its tolerance for falling oil prices. The key question is whether Saudi Arabia, Russia, and other OPEC+ member countries can maintain the oil price at around $75 per barrel. This situation may last for weeks to months, but as time goes on, especially by the end of 2024 and next year, maintaining this price bottom line will become increasingly difficult.

In the middle of this year, OPEC+ member countries reached an agreement to gradually cancel voluntary additional production cuts starting from October. Although the agreement includes a clause to adjust production according to market conditions, the market interpreted this as increased supply leading to a price drop. Despite Prince Abdulaziz bin Salman, the Saudi Energy Minister, expressing optimism about market reactions, the reality has not been the case. Since the announcement of the agreement, global market turmoil has led to a sharp drop in the prices of oil-related financial derivatives, with Brent crude oil prices falling to $75.05 per barrel, the lowest point since the beginning of the year. Despite Brent crude oil prices hovering around $75 per barrel, global oil demand is still growing healthily. The surge in demand in the United States has partially offset the weakness in demand in Asia.

The United States' oil consumption in May set a new high for the same period, and demand in Europe and Asia, especially in India, remains strong. Although there are voices suggesting that global oil demand is declining, the actual situation is that demand growth is slowing down, not falling sharply. Recently, refining profit margins have rebounded, and the consumption of service-type fuels such as gasoline and aviation fuel is strong, and the demand for chemical products is also robust. However, the supply side poses a greater challenge to OPEC+. The oil production of non-OPEC countries, especially in the Americas, is growing rapidly, and the additional production of the United States is enough to meet the growth of global oil consumption. The actual production of OPEC+ also exceeds expectations, including member countries that often exceed their quotas, such as Russia, Iraq, and Kazakhstan, as well as other member countries such as the UAE, Iran, and Venezuela.

As the summer in the Northern Hemisphere ends, oil demand will face a seasonal decline, and OPEC+ plans to increase supply from October, which may lead to oversupply in the market, threatening the oil price level of $75 per barrel. OPEC+ can support oil prices by postponing production increases, but this will mean admitting strategic failure. In addition, even if global oil demand growth remains healthy, the first half of 2025 will be full of challenges for OPEC+. Javier Blas of Bloomberg believes that OPEC+ may need to further reduce production, although this is hard to predict. He points out that OPEC+ is a victim of its own success, and maintaining high oil prices for a long time has hindered the alleviation of global inflation and the decline in interest rates, while subsidizing its main competitors in the United States. Now, the oil price target of $100 per barrel has become a distant memory, and it is unclear how low oil prices can fall.

The latest report from the U.S. Energy Information Administration (EIA) shows that as of the week ending August 2, the significant drawdown of U.S. commercial crude oil inventories exceeded market expectations, with a decrease of 3.728 million barrels, bringing total inventories to 429 million barrels, the lowest level since February 2024. At the same time, U.S. Strategic Petroleum Reserve (SPR) inventories have increased to 375.8 million barrels, the highest level since December 2022. The report also pointed out that U.S. crude oil exports decreased to 3.638 million barrels/day, while domestic crude oil production set a new high, reaching 13.4 million barrels/day. Commercial crude oil imports also decreased from the previous week. In addition, U.S. crude oil imports from Saudi Arabia increased significantly, with an increase of 145%. Analyst Julia Fanzeres commented that the significant drawdown in inventories mainly came from the Gulf Coast and Midwest regions, contrasting with the increase in inventories at the East Coast and Cushing storage centers.

In terms of global crude oil demand, Brent crude oil futures rose slightly in early Asian trading, driven by potential demand from the United States and China. China may issue additional crude oil import quotas to stimulate economic growth, as some small importers have used up their existing quotas. Independent refineries in Shandong Province have applied for more crude oil import quotas for the rest of this year, which may be in response to local government requests. Although the specific timing of the issuance of additional quotas is still unclear, the market expects this to be realized after September. On the other hand, the government of President Joe Biden of the United States is taking advantage of the recent decline in oil prices and plans to deliver up to 3.5 million barrels of crude oil to the U.S. Strategic Petroleum Reserve (SPR) in January through new procurement tenders.

The U.S. Department of Energy has also issued a procurement tender for the delivery of sulfur-containing crude oil to the SPR site in Bayou Choctaw, Louisiana, in January, and plans to issue another tender for the delivery of more crude oil to the SPR facility in Bryan Mound, Texas, in January. That is to say, although the expected weakening of global demand may put pressure on prices, the EIA has slightly lowered its forecast for U.S. crude oil production for this year and next year in its “Short-Term Energy Outlook.” It is expected that the average domestic production of petroleum and other liquid fuels in 2024 will reach 13.23 million barrels per day, which is slightly lower than last month's forecast but still one of the highest forecasts for this year.

At the same time, Russia's crude oil and condensate exports to non-CIS countries decreased by 1% year-on-year last month, to 4.49 million barrels per day, the lowest level since November last year, but nearly 5% higher than in July 2023. It can be seen that the supply and demand dynamics of the global crude oil market are undergoing a series of changes, from the reduction of U.S. inventories to the potential increase in demand in China, and to the adjustment of Russian export volumes. These factors collectively affect the trend and market expectations of international oil prices. On Wednesday of this week, due to market concerns about the tense situation in the Middle East and the temporary suspension of production at major oil fields in Libya, international oil prices rebounded. Data released by the U.S. Energy Information Administration (EIA) shows that crude oil demand remains strong, which further pushed up oil prices. The price of WTI crude oil is close to $75 per barrel.

Specifically, the EIA report shows that in the week ending August 2, U.S. crude oil inventories decreased by 3.728 million barrels, exceeding the expected 700,000 barrels. Analyst Julia Fanzeres pointed out that this reduction has brought U.S. crude oil inventories to their lowest point since February, especially with a significant decrease in inventories along the Gulf Coast and in the Midwest region, although there has been an increase in inventories on the East Coast and at the Cushing storage center. It is worth noting that this is the sixth consecutive week of decline in U.S. crude oil inventories, setting the longest consecutive decline record since January 2022.

Another factor in the rise of oil prices is that the largest oil field in Libya, the Sharara field, has exacerbated market concerns about supply due to the suspension of production, with a daily production capacity of about 300,000 barrels, accounting for nearly one-third of Libya's oil production. In addition, there are concerns that the tense situation in the Middle East may spread to other parts of the world, severely affecting the oil supply chain. 

Despite the global stock market sell-off leading to a sharp decline in oil prices recently, analysts at Goldman Sachs believe that oil prices may have been oversold, and the tense situation in the Middle East and the suspension of production at Libyan oil fields may lead to supply disruptions, while the possibility of a U.S. economic recession is not significant, and Brent crude oil prices may find support around $75. Analyst Bruce Powers also pointed out that WTI crude oil may have bottomed out, and if it breaks through the upper boundary of the converging triangle on the technical chart, it may trigger a rebound, with the first resistance area near $77.02, and the 20-day moving average near $79.14 will be a key level for the rise in oil prices.

After abandoning the $100 oil price target, OPEC+ faces the market's test to maintain the bottom line of $75. Although global demand continues to grow, oversupply and seasonal demand decline may lead to price pressure. In addition, the seasonal decline in demand and the planned increase in production may lead to oversupply in the market, threatening the stability of oil prices. At the same time, the U.S. EIA report shows a significant reduction in crude oil inventories, and potential demand growth in China and the United States may provide support for the market. International oil prices have rebounded due to the impact of the tense situation in the Middle East and the suspension of production at Libyan oil fields, but analysts believe that oil prices may have been oversold, and it is expected that Brent crude oil will have support around $75, and if WTI crude oil breaks through the key technical resistance, it may trigger a rebound.