Macroeconomic Color: Oil Markets in December
Waiting for MAGA2:0
The OPEC+1 ministers are scheduled to meet on December 5 to decide whether or not to go ahead with the scheduled gradual reversal of the voluntary output reduction of 2.2 millions of barrels per day (mbd) in place since 2022.
In making their decision, the major oil exporting countries are facing weak and oversupplied markets, as well as significant geopolitical uncertainties over the mid-term. Oil prices (West Texas Intermediate, WTI) fell to below $70/barrel (bbl) in the last week of November, down to $68/bb on 11/29—a fall of 6% from their November high and almost 19% from the 2024 high of $82/88 on 7/3.
According to the latest Oil Market Report of the International Energy Agency (https://www.iea.org/reports/oil-market-report-november-2024), global oil demand rose by about 1 mbd in 2024 and is expected to rise by another 1 mbd in 2025. Oil markets are well supplied—oil production is projected to exceed demand by 1 mbd in 2024 and with global oil production is expected to increase by 1.5 mbd in 2025—the latter projection does not include any OPEC+ production increase.
The Trump presidency, which will start in 50 days, looms large over the Middle East and oil markets. The Middle East and the world could face one of three scenarios. First, Trump repeats his first term’s policy of maximum pressure on Iran, severely curtailing Iranian exports of about 1.5 mbd (out of a production of about 3.8 mbd). Second, Iran and the U.S engage in a dialogue to reduce tensions, resulting in an easing of the sanctions regime. Third, the standoff between Iran on one side, and the U.S. and Israel on the other continues, with little pressure for resolution. Of course, we might see some combination of these scenarios with different timings. However, short of a worst case with a worst case of military escalation between Iran on one side and the U.S. and Israel on the other, none of these scenarios should result in a significant impact on oil supplies from the region—lost Iranian output, if any, can easily be replaced. In which case, oil markets could suffer from excess supply and price weakness over the medium term (12-18 months), especially as we see increased oil production from both OPEC+ and non-OPEC+ sources2, with oil prices (WTI) in the $60-70 range.
However, we should not be complacent and expect further surprises—including from an incoming administration with a record of impulsive moves.
The OPEC+ grouping includes the major OPEC countries and ten other major oil exporters, including Russia, Mexico and Kazakhstan
The impact of “drill, drill, drill” on U.S. oil production (already at a record level) over the medium term is unclear. Weak oil prices and the end of the shale boom could limit any significant increase in production.