What Can We Expect From OPEC in the Second Half of the Year?
Just as the market is waiting for the Fed to cut rates, so too is OPEC waiting for demand to bounce.
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To the detriment of many bullish analysts and OPEC of course, the Brent Oil price has remained flat since February 2023, trading around $80/bbl. If one were to look at the trajectory of oil prices over the last 10 years or so, it is not really that bad an outcome for certainly OPEC.
That's because there really is no shortage of oil and the only reason why it is holding up here is due to OPEC's very aggressive stance on keeping 6 mbpd of oil out of the market since the Covid crisis, which is about 6% of global demand.
This includes about 3.6 mbpd of cuts from OPEC members valid through the end of 2024, as well as the additional 2.2 mbpd of cuts by some members, mostly Saudi Arabia, expiring at the end of June. The initial lollipop cut of 1mbpd last August was meant to be in place for just one month. Almost a year has gone by and those cuts remain in place.
So, why are prices not rallying given OPEC is forecasting 2.2 mbpd of demand growth in 2024 alone?
Well we know OPEC has every incentive to talk their own book, after all, they need to convince the world that demand is set to pick up so their oil, crown jewel source of revenues, is well sought after. They need those oil dollars to pay for the very aggressive expansion campaigns all over the Middle East, but more so in Saudi Arabia.
If one were to look at the fiscal budget breakeven balances, Saudi needs about $90/bbl. Brent or higher to be breakeven. This is irrespective of their cost of production as that does not matter. The only problem is that as each day passes, they are losing more and more market share to the likes of non-OPEC members and Iran who are all using the US administration's lax attitude to pump and export as much oil as possible.
The biggest consumers of oil are China and India, and they are being fed by Russia despite US sanctions which really have not made any difference other than to make Russia richer and more closely aligned with China breaking away from the dollar swift system.
But non-OPEC supply has also been picking up, which is one of the main reasons several OPEC members argue against these cuts as it hurts them after all their expansion plans over the past few years to increase capacity. For now, the cuts remain in place as they cannot afford a price decline in the low 70s, let alone low 60s! Just as the market is waiting for the Fed to cut rates, so too is OPEC waiting for demand to bounce. But demand has been soggy and inventories sufficient.
Most argue oil can only go up given OPEC+'s floor. But we argue that demand is a dynamic variable that is not being priced by a lot. Last year everyone was convinced we would be in a recession. As one never came, everyone today is convinced of a major recovery towards the 2H24 which should take all goods higher.
Biden's enormous fiscal spend distorted the true path of the economy, delaying the inevitable, perhaps delaying it by more than a year. But make no mistake, the trend is intact. The US was slowing down prior to Covid, but then monetary policy along with fiscal policy pumped about $5 trillion into the economy, pushing it yet one more time.
Today US national debt stands at $36 trillion and every dollar being printed is going towards paying just the US national interest of $1 trillion. When does this madness end? To the central bankers, never. Their logic being since it has always worked, they keep on going. We are at the highest debt post WWII today, grown exponentially over the last five years.
It is an election year so a lot can happen, but if the US economy rolls over right now, the rest of the world won’t be able to help either. The higher oil prices stays for longer will damage the US consumer even more so, especially as their real wages are not able to keep up.
Oil is a commodity that should be trading in the $50-$60/bbl. range if it were not for OPEC+'s cuts. The irony is if they did let oil find its natural floor, perhaps the US and other economies demand may not be as bad. It would certainly give the Federal Reserve room to cut a lot sooner.
Alas, it is not something they are willing to gamble or see through even though it would be better for them, and the global economy, in the long run.
At the time of publication, Maleeha Bengali had no position in the securities mentioned.
