A Realistic Look At The Oil Market Balance In 2024
OPEC+ headlines are back at it again. Don't say that we didn't warn you but these headlines are typical of OPEC+ meetings. The fact that this oil market can't differentiate a "real rift" and a "fake one" is telling of just how apathetic it is. Bloomberg is reporting that Angola and Nigeria are scuffing at the idea of lower production quotas, and oil prices are selling off on the heels of a postponement of the meeting to the 30th of November.
But as any real OPEC watcher will tell you, the quota is just a figure, the fact that Nigeria and Angola can't produce to said quota is another story altogether. As a result, we don't see this creating any kind of rift, and we still expect OPEC+ to announce a coordinated cut in addition to the voluntary cut extension from Russia and Saudi.
More importantly for today, we want to discuss what 2024 balances look like. With oil prices down in the gutters, people are beginning to really question the structural oil bull thesis, or if there is one at all. If the oil market is headed for a structural deficit, why does OPEC+ need to cut at all?
And these are fair concerns, but let us tackle the issue more closely so you can understand why.
2023 Balances
Coming into 2023, we knew H1 2023 was going to be tough. Following the record SPR release (~260 million bbls) in H2 2022, the oil market was already losing momentum. To make matters worse, the 2022-2023 winter was one of the warmest on record, which resulted in ~1 million b/d loss in heating-related demand. Q1 balances, as a result, turned into a larger-than-expected build that required much of the year to eat away.
In addition, oil bulls expected China to stage a strong recovery that was simply absent. We explained earlier in the year that while China's oil demand may have recovered on pace with expectation, the product storage build may have been too large (during the lockdown), which resulted in a delayed impact on the physical market. Simultaneously, China was able to build up a large stockpile of crude, which allowed them to control just how much they wanted to buy on the open market.
In essence, 2023 balances resulted in a minor deficit with Q1 slated to show large builds.
On the supply side, Iran surprised to the upside pushing production to ~3.3 million b/d up from ~2.6 million b/d at the start of 2022. US oil production is on pace to finish year-end at ~13.2 million b/d, but including "transfers to crude oil" or plant condensate, total crude supply is ~13.92 million b/d.
So the supply side did surprise to the upside, which was offset by Saudi's voluntary cut. This is why Q3 and Q4 are still expected to show draws, but this may turn out to be lower than expected after the demand figures are known.
In aggregate, the demand side of the story didn't pan out, and supplies marginally surprised to the upside resulting in 2023 showing a minor deficit.