OPEC+ will hold its monthly meeting to decide oil production quotas for its members over the coming weekend. There is rampant speculation that it will increase supply once again, amid economists’ warnings that the global crude market is seeing weaker demand. The expectations have pushed Brent and WTI lower through the course of the week, giving it the worst performance in over three months.
The issue of a lack of equilibrium between supply and demand is illustrated by the events unfolding in geopolitics. Usually, threats to supply would increase the price of oil. However, apparently, traders believe that supply will exceed demand enough that events such as a major oil refinery fire in California and continued Ukrainian attacks on Russian refineries have failed to halt the decline in crude.
What to Expect of the Meeting
The OPEC+ meeting is scheduled for Sunday and is widely expected to agree on releasing more curtailed production starting in November. At the last meeting, it raised output authorizations by 400K barrels per day, effectively ending the curtailments that had begun in 2023. Saudi Arabia had held back 3 million bbl/day of production, and has diligently increased supply after each meeting until restoring that capacity.
Analysts at JPmorgan implied that the September meeting was a watershed moment for oil, saying that they anticipated the oil market would move towards a sizeable surplus. If OPEC+ were to increase production at the October meeting, that would imply an increase over the pre-curtailment range.
Is the Market Really Out of Balance
Not everyone agrees that supply will exceed demand, however. The issue primarily relates to expectations surrounding global economic growth and the effectiveness of sanctions on Russian exports. The IEA sees a slowing global economy as a result of the trade wars dampening demand. The high tariffs on China, the largest importer of crude, are forecast to lower energy demand and depress prices.
The OPEC forecasts, on the other hand, predict that demand will continue to increase substantially. So far, the US economy has remained resilient and outperformed forecasts. China’s industrial activity has remained resilient, if not dramatically beating expectations. Meanwhile, Ukrainian attacks on Russian refineries have caused Russia to see supply problems and suspend the export of refined crude products. But, this hasn’t stopped the flow of unrefined crude towards destinations in China and India. Only time will tell whether the IEA or OPEC has the more accurate forecasts on the market.
Are the Worries Oversized?
The market’s reaction to the OPEC+ meeting will depend on whether it meets expectations. It appears that the market is pricing in another 400,000 bbl/day increase, which explains the significant drop in prices over the last week. If OPEC doesn’t deliver the large production increase, then crude prices could correct to the upside.
Meanwhile, the US government shutdown could weigh more heavily on the price of crude. A brief shutdown would likely have a minimal impact on supply and demand. However, as time passes, the market could be affected if the agencies tasked with permitting new production remain closed. A prolonged shutdown would also weigh on the US economy, and by extension, demand for crude.