Listen: What's in store for OPEC+ in 2024?

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Herman Wang:

Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights, where today we'll be talking about all things OPEC+.

I'm Herman Wang, associate director EMEA upstream oil news, and I'm joined today by S&P Global Commodity Insights' global head of crude oil and mobility research, Jim Burkhard. And on the news side of things, lead OPEC+ reporter, Rosemary Griffin, and Africa oil news reporter Charlie Mitchell. Jim, let's start with you and look at your OPEC+ production forecast. You guys have come out with your forecast saying that the group likely needs to cut more production in Q1 as they try to balance the market and try to protect prices. What are those expectations based on?

Jim Burkhard:

Well, the fundamental dynamic currently that we see in the world is non-OPEC supply growth is going to be greater than demand growth. We saw that in 2023, we expect that to be the case in 2024. In other words, production growth from the US, Canada in 2024, Brazil, Guyana, a few other places are going to be greater than world oil demand growth for the second consecutive year. So that means OPEC+ has to maintain production restraint, w,e think for the whole year to prevent inventory builds from bringing prices down a lot more than where they are right now. There's lots of spare capacity, there could be a bit more later this year and 2025. But supply restraint is something that's not going to go away this year for OPEC+. Another challenging year, can they achieve their market objectives? Yes, they can. But it will take supply restraint probably for the entire year.

Herman Wang:

Yeah, so by my count, this is the fourth tranche of OPEC+ cuts that we've seen since October 2022. And as they try to protect prices and then these voluntary cuts now by Saudi Arabia and several other OPEC+ members to... Saudi Arabia at 9 million barrels per day. How long do you think Jim, will they stay at 9 million barrels per day? 'Cause this is a historic low for them, if you take out the pandemic cuts, if you take out that attack on Abqaiq, we're seeing some of the lowest levels of production from Saudi Arabia since in over a decade. So what's the thinking among Saudi Arabia in maintaining this cut?

Jim Burkhard:

I think the key is that they see other OPEC+ countries participating in the cuts, particularly Russia. Is Russia doing what they said they would do with their export cuts? And the answer is so far, yes, they're doing that. So I think at 9 million barrels per day, would Saudi be willing to maintain that for the entire year? Yes, I think so, as long as others are contributing in some way. I think further unilateral cuts, that'd be pretty tough to swallow, I think. But if others are participating, adhering to the cuts, I think we could see 9 million barrels per day be sustained. And one other thing, Herman, I failed to mention, semand growth is not weak, this is not an issue of weak demand growth. Demand growth was strong last year, it's going to be a little bit slower this year, but not weak. This is really about supply growth outside of OPEC+.

Herman Wang:

Yeah, that is one of the more interesting things about the oil market these days with demand growth. And then we're expecting, as you say, another year of growth and oil demand to record levels. We're still seeing oil prices stuck in the 70s to 80s range. Now, OPEC itself has a bit of a different narrative that it wants to spin. And we just recently had the OPEC monthly oil market report come out, which Rose, you covered. And it tells a much different story than the one that Jim is talking about in terms of oil demand, and the pace of oil demand growth, and the pace of non-OPEC supply growth. So Rose, what are some takeaways from the OPEC monthly oil market report that just came out?

Rosemary Griffin:

Thanks, Herman. So OPEC is still very optimistic. They're also forecasting pretty strong global demand growth next year and in 2025. So their latest numbers are demand growth of 2.25 million barrels a day for 2024 and a further 1.8 million barrels a day in 2025. And so it also sees the call on its own crude well over its current production, which is around 27 million barrels a day, and it thinks that the call on its crude is going to be healthy up to the end of 2025. And the thing that it's mainly basing this on is positive economic forecasts, particularly for China. And one thing that I thought was really interesting was OPEC said that it doesn't expect political or geopolitical events to materially alter that positive economic outlook. And considering the current situation that we have in Ukraine and the Middle East, I just thought that was really, really quite remarkable. On the non-OPEC supply growth story, it's currently estimating non-OPEC production growing by 1.3 million barrels a day this year and next year. And mainly, coming from the US but also Canada, Guyana, Brazil, Norway, and Kazakhstan contributing.

And one thing that was interesting about the latest report was it actually revised the 2024 number slightly down, and in 2023, we'd seen repeated increases to that. So that's going to be a really interesting thing to track how they see that going forward. Obviously, with some other market watchers estimating the growth is much higher rate than OPEC itself is.

Herman Wang:

Yeah. I guess, if their forecast comes true, that puts OPEC in a pretty good position as that swing producer to even perhaps raise production in the coming months, if these demand forecasts as they see it come true. I'm just sort of curious, Jim, from your analytics background, what is OPEC seeing that you're not seeing, or what are you seeing that OPEC's not seeing? You clearly have a different diverging forecast here.

Jim Burkhard:

Well, when it comes to predictions about the future, you can't say anyone's right or wrong because the future hasn't happened yet. So I'm not going to say who's right and who's wrong. If you'd look back at 2023, a year ago at this time, there are a lot of voices talking about recession, particularly in the United States. We did not make that call, but there certainly was a big buildup, but it didn't happen. So in 2024, is there going to be a recession? We don't think so, we think global growth will be a bit slower. The impact of higher interest rates, it's not a big bang where all those impacts suddenly materialize. But as loans get rolled over, as new activity takes place, new loan activity, that can start to have an impact on the economy in terms of slowing it. So I think we're not going to have a recession in 2024. Our outlook for global growth is above 2%, and below 2% is kind of the benchmark for whether there's a global recession or not.

We do see demand a bit slower if you compare our forecast demand growth to be a bit slower than OPEC. And the main reason for ours is China reopened last year and that was a big boost to oil demand growth. China's not going to reopen again in 2024. We will still see growth out of China for sure, but we're just a bit more cautious, I think, about the volumes we'll see in terms of demand growth, particularly from Asia.

Herman Wang:

Yeah, everyone seems to be eagle eyeing those Chinese economic numbers. Every time there's an economic indicator out of China coming out, people trying to parse that into what it means for oil demand. And it's been all eyes on China for the last couple years now since the pandemic. I want to turn to Charlie because there's a lot of interesting things happening on the African continent as it relates to oil supply, as it relates to OPEC. First of all, in immediate sense, we've got an outage in Libya with force majeure on the Sharara field. That's about 300,000 barrels per day of light sweet crude coming out of the Sharara field into the Mediterranean market which started being impacted by the outage in Northern Iraq with the lack of exports out of the Turkish port of Ceyhan. Charlie, you've been following this Libyan situation, the different political sides wrangling over control of the oil sector there. What's happening?

Charlie Mitchell:

Yeah, thanks Herman. So on January the 7th, the Libyan national oil company declared force majeure on the Sharara field, as you say, 300,000 barrels a day. It's Libya's largest field. It marks sort of a bit of a return to political actors, protesters, armed groups disrupting oil fields in Libya, which is something that's happened very regularly since the NATO backed uprising against Gaddafi in 2011. There are fears that the protests could spread actually including to Zawiya refinery, which is the largest refinery in Libya, 120,000 barrels a day. As well as Eni's Mellitah Complex, which listeners may know would disrupt gas supply to Europe through the Green Stream pipeline. Libya had quite a peaceful 2023 when it comes to oil production, average of about 1.13 million barrels a day, which is down from obviously 1.6 million before 2011 but marked a kind of new fresh stability in the oil sector following this 2020 truce between these rival administrations in the countries west and east.

But there is a UN process which has kicked off to try and move the country towards elections and therefore, a whole bunch of political jostling is taking place between rival governments, as I said, but also the powerful heads of these massive institutions like the Central Bank and the national oil company. So analysts are expecting a fairly fraught year on the political front, which could definitely spill over into the oil sector because 98% roughly of Libyan government revenue comes from the oil sector. It's basically what makes everything work in the country. And so all of the battles that take place in the North African country are played out in the oil sector and the national oil company.

Herman Wang:

Yeah, and we've seen Libya really trying to improve that investment environment. As you mentioned, 2023 seemed like production relatively stable. Now, they want to set the state for the next growth of that, but the Sharara incident and then some of the other instability percolating up within the country seems like it might jeopardize that. What's the outlook in terms of getting this investment to try and raise that target back up to the 1.2 million barrels per day that they had before?

Charlie Mitchell:

Well, you're absolutely right. The NOC has a target of 2 million barrels a day in three to five years, which would be a massive increase. The recent protests and political wrangling have followed a return actually of IOCs to Libya. And we've seen Eni for instance, with its A&E structures, massive gas project. There are some other negotiations taking place between IOCs and the NOC for new projects, particularly in exploration. Lots of IOCs have lifted force majeure on exploration in Libya. That was quite encouraging actually from an oil sector standpoint. However, as I said, they may now be deterred by what looks like a return to oil field disruption by protesters and armed groups and different political factions. And that could compromise Libya's ability to get that vital investment in through the door and reach these very high targets that they've set for themselves.

Herman Wang:

Yeah, absolutely. A little further south, we've got Angola, which was a part of OPEC up until December 31st. And then they left OPEC over a dispute over production quotas. Charlie, again, you've been following this issue closely. Talk us through the decision-making from the Angolan government. Why quit OPEC now? What's been happening and what does this mean for the future stability of OPEC, particularly with some of these African countries that, like Angola, have been struggling to reach their production targets?

Charlie Mitchell:

Yeah, so 16 years of membership comes with them for Angola, quite a big change. Various theories were bounded around in the aftermath of that, including this visit that Joao Lourenco, the Angolan president, took to Washington where the Americans made some promises of investment in Angola's energy sector. But actually, it's quite simple. Essentially OPEC had cut Angola's production quota for 2024 quite substantially, by more actually than other African producers who were also failing to hit their production quotas. And it was to a level that Angola found unacceptable, and over a months-long argument over this, in fact, we were there in June covering it when Angolan oil minister Diamantino Azevedo stormed out at the meeting, went to the airport early, and that was the beginning of this latest row. And it came to a conclusion essentially when they decided to leave. Essentially, they'd had enough, they said that they were leaving in defense of their own interests.

What happened was that the under-producing African countries, particularly Angola, Republic of Congo, and Nigeria that have been failing to hit their quotas for years now, were given this five-month grace period where they were given the opportunity essentially to prove higher production capacity. If they were able to do that, they would get higher quotas. Angola was unable to do so and saw its quota being cut from 1.46 million barrels a day in 2023 to 1.11 million barrels per day in 2024. That's actually below December production, which was 1.12. So that was totally unacceptable for the country, and they decided to leave. Insiders though, say that they had been disgruntled for some time actually, particularly at the Saudi dominance of OPEC. And the African members, as you hinted to, Herman, have seen their influence wane very much in recent years since really the death of Mohammed Barkindo, who was from Nigeria, who was the former secretary general of OPEC who died in 2022. That was sort of under his tenure, African countries were at the peak of their influence within the group. And that's now slipped, particularly because they've been missing production quotas.

And so it fueled, I guess, the disgruntlement that Angola had and the others too. Nigeria and Republic of Congo remain in the group, but the impact that they're able to have or the say that they're able to have will depend now on whether they can get their production up and manage to reach their production targets moving forward.

Herman Wang:

Yeah, I mean that lent itself to a very kind of a chaotic scene in terms of the OPEC meeting back in November 30th. And Rose, you were leading our OPEC meeting coverage from that event. I wonder if you could talk us through what was it like to cover that meeting because it was a lot of rescheduling, a lot of delegates unhappy, they couldn't come to a decision. And how does that set the stage for the next meeting? The next scheduled meeting is June 1st, but of course, they might meet earlier, particularly if the market doesn't turn as they hope. And so Rose, what was it like covering that meeting?

Rosemary Griffin:

It was an interesting meeting. I mean, unfortunately, we couldn't be on the ground for that one, which always makes things slightly trickier. I think it set us up for an interesting 2024. A couple of things that I think are going to be really crucial. One is compliance, and I think Russia is going to be a really interesting one to watch from that perspective. And price is going to be a huge issue as well. We've seen the price go in the opposite direction to what they were hoping for since that meeting. The Dated Brent price is now below what it was on the eve of that meeting. It really seems like these cuts have started to lose the impact that they maybe hoped that they'd have on the market. I mean, I think that the security situation is also going to play a key role. In many ways it's quite surprising that this now almost-constant barrage of attacks in the Red Sea is not having a bigger impact. We've also obviously got the conflict in Ukraine still rumbles on and Russian oil export infrastructure is continuing to be a target.

But just on the Russia-specific side, I think the differential between Urals and Dated Brent is a really interesting one to watch in terms of Russia's approach to some of these talks. And at points since Russia invaded Ukraine, that differential has been as large as $40 a barrel. We're now much less than that, we're at $18 a barrel thereabouts at the moment. But that's crept up around $5 in the last couple of months of 2023. That's primarily linked to sanctioning countries talking about that they're actually going to focus on compliance of sanctions, and more shippers and buyers of Russian crude getting a little bit scared that they may actually be penalized for trading with Russia. And if you track how that differential developed, you can really see the point at which Russia decided to intervene on a production side. So Russia was the first country to introduce its voluntary cuts, and that was partially in response to these very significant discounts.

So I think tracking that differential going forward will be a very interesting one to watch in terms of how Russia approaches things, and then that's going to feed into a broader economic picture, a broader price picture, which is obviously going to be affecting all of the producers in the group.

Herman Wang:

Yeah, I mean, the role of Russia in these OPEC+ cuts over the last couple of months... Of course, the Russian contribution comes with a bit of an asterisk, a little star there because it's an export cut, not a production cut. And a lot of that is influenced, as you say, Rose, by the Urals pricing and how the enforcement of the G7 price cap on that. Jim, you touched on Russia earlier in your comments and on whether or not they're compliant with their 300,000 barrel per day export cuts that they pledged. Can you talk about that a little more? I mean, do you see them complying with this and how do you see the sanctions enforcement influencing Russian production?

Jim Burkhard:

Russia has been complying with what they've said they would do in terms of export cuts. Sometimes, numbers on a monthly basis can be a little bit higher or lower than what they promised if there's a storm in the Black Sea, for example, but they do seem to be complying. When it comes to sanctions, that's an interesting question. The price differential to Urals was higher before the price cap, it was wider. So that is a comment on the effectiveness of the price cap. When it comes to the overall issue of sanctions, there is this possibility that we could see Russian production capacity deteriorate over time. But do sanctions really work? Do they achieve their objectives? Look at Cuba. If sanctions worked, Cuba would be a very different country today. Iran would be a very different country if sanctions worked. Now, do sanctions have an impact? Yes, for those who apply them there is some political need or perhaps some moral satisfaction from their perspective when they apply these sanctions. But do they really work at harming or debilitating the target country? Yes, they create problems and challenges, no doubt.

Russia is a very large country with lots of domestic resources, including human capital. As sanctions come up, Russia finds ways around them. And they have a huge partner in China that can supply a lot of things. So sanctions create some difficulties for Russia, no doubt. But I think their ultimate effectiveness is certainly debatable, and there's not a lot of evidence that it's hurt Russia more than it's hurt the West to some extent.

Herman Wang:

On that sanctions front, the US is now designating the Houthis as a terrorist organization with the sanctions that come with that designation. And a lot of questions about the usefulness of the US-UK military campaign against the Houthis in terms of stopping these maritime attacks in the Red Sea. And we're seeing companies like BP, Shell now starting to avoid the Red Sea. We haven't seen a lot of impact from these Red Sea attacks on the oil price, but do you think that's going to change?

Jim Burkhard:

It's remarkable, Herman. The oil price, today's January 17th, it's been kind of remarkably stable, 75 to 80. So the Houthi attacks, it's a big deal, obviously, it's a big deal for shipping. But keep in mind, it has not impacted oil production. This is a logistical challenge. There are alternatives. You've got to sail around Africa, so that adds a couple of weeks, adds cost, but there are alternatives to it. I think the bigger issue is for the global economy. Container shipping rates have really gone up a lot over the last month. This is going to create supply chain difficulties or makes long supply chains even longer for the global economy. So there certainly is a challenge for the oil industry, for the shipping industry, for those who ship oil, no question about that. It's increasing costs, but it's not impacting production. And I think, at least in my mind, the bigger concern is the impact on the broader global economy over the next couple of months and will that lead to slower economic growth than maybe we had previously anticipated.

Herman Wang:

Then from OPEC's point of view, as Rose said earlier, they don't see these geopolitics impacting the global economy in any kind of meaningful way. Will that be true? We'll have to see as the months come. So I think let's leave the conversation there, it's been a very interesting discussion so far. Thanks a lot to Jim, Charlie, and Rosemary for joining me in this conversation. And thank you to our listeners for tuning in. If you've enjoyed our conversation today, you can hear more about how we see the OPEC+ influence in the markets in 2024 at the S&P Global Commodity Insights London Energy Forum on February 26th through 27th. Thanks, and we hope to see you there.