Opec+ is doing some work to rebalance the market in the first quarter.
And, you know, a base case is they'll be successful in doing that.
The pressure increases for them to roll these cuts forward through the remainder
of the year. Actually, we forecast around a million
barrel a day surplus for the second quarter and around an overall surplus of
about 0.6 million barrels a day through the whole of 2024.
So, you know, these cuts do need to be
maintained to balance the market through the course of next year in our kind of
base case, global growth environment. In the base case, what is the
relationship of Saudi Arabia to oil producing Russia and Iran?
Sure. Well, obviously, there's a there's a lot
of complex factors going on with the political relationships between these
countries. Overall, Saudi's taking the brunt of the
cuts so far. And, you know, Russia is contributing
and we expect them to continue to do so. They've been pretty forthright in what
they want to do and in their expectations of countries meeting their
quotas through the first quarter. And overall, I think that these you
know, when you look at the trade off of the OPEC plus countries, they
essentially maintain the existing cuts have some incremental compliance and
they can balance this market and keep this price at 70 to $80 if they if they
work together. So the alternative is obviously
substantial spare capacity gets ramped up into.
And prices could be down 30, 40, you know, even even 50% if all of that spare
capacity comes back online. So I think the alternative is just so
painful that it's most likely you get this kind of half a million barrel a day
cut through the through the course of next year at the right price.
So, well, 70, $80 is the right kind of price levels.
And I want to develop that a little bit, Max, because you're talking about a
potential 40% price cut that could be a $40 handle and Brent crude, even $35 a
tie. And this comes as we heard from Paul
Sankey last week. There is this risk that as the U.S.
ramps up production, that Saudi Arabia loses share market share to the U.S.
So flood the market. They'll just say, look, you guys are
going to do this. Let's go and put all the barrels out
there and get prices low enough that people start cutting production.
What holds them back from doing that? Well, I think, obviously that, you know,
that kind of price decline will hurt everybody's profits and revenues.
I think the stick or the stick that Saudi has is quite effective in the
sense that they have the ability to raise production by 20% themselves.
So they could offset, for example, on paper, a 20% decline in price with a big
increase in their own production. Not many other frankly, very few other
opec+ countries have the ability to do that.
So in the worst case scenario, it's potentially least painful for Saudi
Arabia and more painful for everybody else.
So I do think that that that dynamic makes the stick quite effective.
Obviously, if there was a hard landing on the demand side, if non-OPEC supply
continue to grow extremely strongly. And on that note, we do have a material
slowdown sequentially in US growth in our forecast for the next 12 months.
Most of the growth that we have is actually OPEC plus bringing back some
barrels and or ramping up over the next 12 months.
So if you take that out of the market, if these cuts were extended, you're
actually running a deficit in the first quarter if the quotas are met as well.
And overall, if broadly the quotas amount because we are assuming some
slippage to get our balance small, you know, 100,000 barrel a day surplus in
the first quarter. So it does appear that it's within Opec+
grasp to hold the market together in the baseline.
But yeah, look, a hard landing on the demand side, big surprises on the upside
on supply disruptions in normal, perhaps OPEC
might break. But look, I just I think you have to get
into a pretty dark global growth environment to get to even think about
that. Which raises this question, are we in a
narrow range? You said, you know, there could
potentially be some sort of significant downside should production come back
online, but you see that as improbable. So are we in a pretty narrow range after
a lot of really massive swings over the past couple of years?
Yeah, I mean, certainly we think so in positioning is extremely low now.
The spreads have collapsed and yet the price is being supported here.
It's found some, you know, base here, we think around $75.
If anything, the base case is we bounce back over the next month or two.
Prices stabilize a little bit here. We think, you know, China is going to.
Roll out a significant easing package. Significant as in to stabilize the ship.
Not significant as in a 10% easing as a share of GDP, but significant enough
that the market thinks that China would be fine next year, be able to achieve
four and a half, 5% GDP growth. And, you know, there's been some big
build slightly that we expect to to stop.
Essentially, we expect a reduction in the builds in inventory that we've seen
over the last three weeks, over the next couple of months.
So we are expecting a stabilization in prices.