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Pronounced oil oversupply likely if OPEC raises output, Macquarie says

Published 12/03/2024, 06:56 PM
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Investing.com -- OPEC is set to meet this week, and the group’s next decision could have notable implications for global markets, according to Macquarie strategists.

The organization’s meeting this week comes at a time of heightened uncertainty, and should it decide to increase supply, strategists believe “the scales would tilt heavily towards pronounced oversupply in oil.”

While OPEC has postponed production increases originally planned for October and December, the potential for a January supply hike remains. Macquarie noted it “would be surprised to see OPEC announce the return of supply for Jan. '25; surprised, but not shocked.”

A decision to restore supply could signal a pivot toward the “oft-feared ‘market share’ strategy” that has characterized some of OPEC’s past price wars.

Saudi Arabia, a key OPEC player, faces a delicate balance. Its fiscal breakeven oil price, estimated by the IMF at $98 per barrel for 2024, contrasts with current levels and suggests financial pressures. However, Saudi Arabia’s discussions of a “deficit by design” strategy imply greater tolerance for lower prices.

Macquarie points to Saudi foreign reserves and a low debt-to-GDP ratio as indicators of resilience. Yet, the risk remains that supply increases could drive prices “well below the current range.”

“From a high level, we think a shift to a strategy of slow production increases from Saudi Arabia constitutes a reasonable starting point. As such, the key question may simply be the aggressiveness with which Saudi Arabia intends to return supply,” strategists commented.

Adding to the complexity is the global demand outlook. Post-pandemic recovery in oil consumption has slowed, with the IEA forecasting modest growth of 0.9 million barrels per day in 2024.

Structural shifts, such as the rising adoption of EVs and biofuels, are likely to weigh on the demand for traditional fuels. In China, a historical engine of oil demand growth, consumption of diesel and gasoline is projected to have peaked, presenting additional headwinds.

The note also highlights the role of US production, which has grown over 60% since 2014 and now accounts for a significant portion of global supply. This growth, coupled with de-bottlenecking efforts in Canada and Argentina, signals a robust capacity for short-cycle supply increases that could further pressure prices.

Overall, Macquarie strategists point out the potential for volatility, noting that sudden shifts in OPEC policy “are seldom anticipated by the market and we see the recent bias towards market support facing fundamental supply and demand pressures.”

“All that is to say, while a hard policy shift appears unlikely at this point, we believe it cannot be altogether dismissed,” they added.

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