Pronounced oil oversupply seemingly if OPEC raises output, Macquarie says

Investing.com — OPEC is ready to satisfy this week, and the group’s subsequent determination may have notable implications for world markets, in keeping with Macquarie strategists.

The group’s assembly this week comes at a time of heightened uncertainty, and will it resolve to extend provide, strategists imagine “the scales would tilt closely in the direction of pronounced oversupply in oil.”

Whereas OPEC has postponed manufacturing will increase initially deliberate for October and December, the potential for a January provide hike stays. Macquarie famous it “could be stunned to see OPEC announce the return of provide for Jan. ’25; stunned, however not shocked.”

A call to revive provide may sign a pivot towards the “oft-feared ‘market share’ technique” that has characterised a few of OPEC’s previous value wars.

Saudi Arabia, a key OPEC participant, faces a fragile steadiness. Its fiscal breakeven oil value, estimated by the IMF at $98 per barrel for 2024, contrasts with present ranges and suggests monetary pressures. Nevertheless, Saudi Arabia’s discussions of a “deficit by design” technique indicate larger tolerance for decrease costs.

Macquarie factors to Saudi international reserves and a low debt-to-GDP ratio as indicators of resilience. But, the chance stays that offer will increase may drive costs “nicely under the present vary.”

“From a excessive stage, we expect a shift to a technique of gradual manufacturing will increase from Saudi Arabia constitutes an inexpensive start line. As such, the important thing query could merely be the aggressiveness with which Saudi Arabia intends to return provide,” strategists commented.

Including to the complexity is the worldwide demand outlook. Publish-pandemic restoration in oil consumption has slowed, with the IEA forecasting modest progress of 0.9 million barrels per day in 2024.

Structural shifts, such because the rising adoption of EVs and biofuels, are more likely to weigh on the demand for conventional fuels. In China, a historic engine of oil demand progress, consumption of diesel and gasoline is projected to have peaked, presenting extra headwinds.

The observe additionally highlights the position of US manufacturing, which has grown over 60% since 2014 and now accounts for a good portion of world provide. This progress, coupled with de-bottlenecking efforts in Canada and Argentina, alerts a strong capability for short-cycle provide will increase that would additional stress costs.

General, Macquarie strategists level out the potential for volatility, noting that sudden shifts in OPEC coverage “are seldom anticipated by the market and we see the latest bias in the direction of market assist dealing with elementary provide and demand pressures.”

“All that’s to say, whereas a tough coverage shift seems unlikely at this level, we imagine it can’t be altogether dismissed,” they added.