Geopolitical risk, uncertainty over the extent of oil demand growth, particularly in China, and a possible change in U.S. energy policy under incoming President Donald Trump’s administration are the main factors that the OPEC+ will have to contend with in 2025.
Because of all these variables, the OPEC+ adopted a cautious approach throughout 2024 and to some extent, the alliance succeeded in maintaining a delicate market balance though it meant having to sacrifice market share to the United States and other non-OPEC+ oil producers. The policy adopted by the group led by Saudi Arabia and Russia prevented oil prices from falling below $70 per barrel level.
Production cuts
Since October 2022, the OPEC+ has slashed a total of 5.8 million barrels per day (b/d) of crude oil, of which 3.9 million b/d were voluntary cuts. The last tranche of the voluntary cuts, totaling 2.2 million b/d, came into effect in January 2024 as the OPEC+ struggled to prevent a slide in oil prices. This was because Chinese demand projections were revised lower in the final stretch of 2024 as economic stimulus measures by Beijing failed to boost oil demand.
After twice postponing the tapering of the voluntary cuts, the OPEC+ ministers decided on December 5 to defer the return of these barrels and wait out the first quarter of 2025. At their last conference of the year, the OPEC+ ministers set out a multi-faceted output pathway to 2026.
As outlined in an OPEC press release, the eight OPEC+ producers, which had been due to start restoring barrels gradually at a rate of 180,000 b/d, agreed to postpone the return of 2.2 million b/d of the voluntary cuts to March 2025, a year later than originally planned. They also slowed the pace of the increases, which had been due to start in January 2025. From an initial planned 12-month taper, the 2.2 million b/d will be returned to the market between April 2025 and September 2026.
The UAE, which has taken on the largest pro-rata share of the cuts when taking into account its rising production capacity, agreed to defer a 300,000 b/d base increase that it was accorded. The UAE puts its current maximum oil production capacity at 4.85 million b/d, which, under its current “required production” allocation, means it is sitting on more than 1 million b/d of idle capacity.
Before the December agreement, the International Energy Agency (IEA) had predicted that even if the OPEC+ adhered to the full cuts, the market would be in surplus in 2025 to the tune of 1.5 million b/d. Following the OPEC+ deferral, the IEA in its December Oil Market Report, slightly revised down its estimate, though it still expects a surplus of 950,000 b/d, including a 1 million b/d stock build in the first quarter, traditionally a low-demand period.
In its December report, the IEA noted that the OPEC+ decision “has materially reduced the potential supply overhang that was set to emerge next year.” In contrast, the U.S. Energy Information Administration (EIA) expects a stock drawdown of 700,000 b/d, with inventories then building by 100,000 b/d over the remainder of the year.
Diverging outlooks
Yet as 2024 drew to a close, the overall picture of where supply-demand balances stand remained unclear, with the IEA, OPEC and the U.S. EIA presenting diverging outlooks.
However, the fact that OPEC had to revise down Chinese oil demand expectations for five straight months would point to a bearish market. The OPEC+ has also been plagued by persistent violations of production allocations, mainly by Iraq, Kazakhstan, and Russia, which complicated efforts by the group to manage the overhang amid rising output from the non-OPEC+ producers.
The market consensus has grown increasingly bearish in recent months. OPEC, having stuck to a bullish demand assessment for much of 2024, revised down its expectations by 210,000 b/d since August to 1.61 million b/d, mainly because of a 570,000 b/d revision in the third quarter. This still puts it above the IEA’s 2024 forecast of 840,000 b/d demand growth, though the gap has narrowed since the start of the year, when OPEC expected growth to top 2 million b/d.
The IEA noted that “the abrupt halt to Chinese oil demand growth this year — along with sharply lower increases in other notable emerging and developing economies tilted consensus toward a softer outlook.”
While oil prices remained largely range-bound in 2024, the major spikes were due to geopolitical tensions over fears of a wider Middle Eastern war involving Iran and Israel. Oil prices soared above $90 per barrel in April after Israel launched air strikes against Iranian military facilities but avoided striking energy infrastructure. Prices eased back sharply when it became clear that Middle Eastern oil supplies would not be affected, though prices were back up again after Iran retaliated in October, firing more than 180 missiles at Israel. They rose briefly after the Wall Street Journal reported on December 13 that Trump was weighing options to stop Iran’s nuclear program, including the possibility of “preventive air strikes.”
Uncertainties and changing landscape
The incoming U.S. policy toward Iran remains one of the big unknowns. Iran, while exempt from OPEC+ output restrictions, has managed to maintain its oil production, albeit below maximum capacity due to sanctions. It has also been able to export its oil, mainly to China, having found a way to evade lax enforcement of sanctions by the Biden administration.
The incoming Trump administration is likely to adopt an even tougher policy against Tehran this time around and amplify the “maximum pressure” campaign it applied during Trump’s previous term in office. Should that occur, it could shrink Iran’s oil and condensate exports, which shipping data by Kpler shows have averaged 1.57 million b/d in 2024.
All this is taking place while the oil producers and companies are adapting to a changing energy landscape due to the ongoing transition and fast-paced electrification of key sectors, such as transportation, that have traditionally relied on oil. Meanwhile, the deployment of renewable energy for power generation is growing at a faster pace with investment in solar and wind energy surpassing funds going into oil and gas projects.
As 2024 came to a close, oil markets remained under a cloud of uncertainty shaped by geopolitical risks, weaker-than-expected Chinese demand, and an evolving energy transition. The OPEC+ group’s ability to balance market fundamentals while responding to geopolitical shocks will define its role in 2025.
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