Citi commodity strategists project that, absent significant supply disruptions, OPEC+ is likely to maintain its 1Q’24 production cuts throughout 2024, initiating a tapering process only in 2H’25 due to diminishing effectiveness.
This strategic move aims to balance global oil markets, potentially sustaining oil prices above $70/bbl on a Brent basis throughout 2024, analysts said.
The rationale behind rolling over production cuts is not only to avoid a sharp price drop, often deemed as "shock therapy," but also to align with the economically rational move for OPEC+ members from an earnings perspective in 2024.
While this approach keeps the global oil market finely balanced for 2024, potential major supply disruptions pose challenges. In the event of disruptions, OPEC+ could reintroduce spare capacity to mitigate price volatility.
Looking ahead to 2025, Citi notes that OPEC+ faces mounting challenges as a significant surplus looms despite extended production cuts. The base case envisions a 1.2-m b/d surplus on average, making it increasingly difficult to sustain oil prices above $70/bbl on a Brent basis.
Even if production cuts continue until the end of 2025, a 0.7-m b/d surplus is anticipated. Any attempts by the producer group to increase production risk triggering a substantial drop in oil prices, potentially reaching $55-60 on a Brent basis by 2H’25.
“These oil price views would suggest that investors sell price spikes, and potentially look for cheap downside optionality, while producers would be well served to look for downside protection, particularly for 2025,” analysts wrote in a note.
Brent oil prices are expected to average $74 in 2024 and $60 in 2025, although Citi strategists say that ongoing geopolitical tensions, such as recent activities in the Red Sea, could introduce near-term upside to the risk premium in oil prices.
Overall, Citi’s bear case calls for oil prices trading in a $50-60 range while the bull case sees prices into the high $80s and even $90.
Citi’s forecast is based on the projection for global oil demand growth to slow down from 1.9-m b/d in 2023 to 1.3-m b/d in 2024 and 0.7-m b/d in 2025.