This week, the International Energy Agency (IEA) has released its latest monthly report covering the month of September. The IEA has revised down its demand numbers for 2024 by 200 kb/d from 103.0 to 102.8 mb/d and its 2025 number down by 100 kb/d from 103.9 to 103.8 mb/d. The non-OPEC supply figures remain unchanged, however, so the IEA has revised down its estimate of the amount OPEC needs to produce to balance the market by 200 kb/d this year and 100 kb/d next year. This brings the estimate of the call on OPEC down to 26.1 mb/d which compares to the IEA's estimate of September output of 26.7 mb/d, which is down by 650 kb/d on the previous month, largely due to lower Libyan output. If OPEC were to continue to produce at this level next year, the IEA's numbers suggest an oversupply of 600 kb/d.
The tone of the IEA's report continues to point to an oversupplied market next year, that will be exacerbated if certain OPEC members push ahead with their intention to increase supply in a phased approach starting in December. Recently published Chinese GDP data indicate that in the third quarter the economy grew by 4.6% y/y which is the slowest pace of growth since early 2023 and is well below the government's 5% growth target. Meanwhile the property sector continues to be a drag on the economy, with new home prices falling by 5.8% in September, following a fall of 5.3% in August. All of which adds to the gloomy outlook for the oil market for next year.
In early September, Brent traded below 69 \$/b for the first time since December 21. As the fundamental outlook has deteriorated since then, the market could very well have continued to trade lower were it not for a resurgence in the geo-political risk premium associated with the conflict in the Middle East. Brent rallied back over 80 \$/b after the Iranian missile strike on Israel. This move higher was exacerbated by short positions built up by speculators over the summer. As the market started to rise, those speculators bought back oil to cover their short positions to prevent further losses, thus accelerating the rally.
For now, a measure of stability has returned to the market in the 73 to 75 \$/b area, but the market remains very apprehensive about the next developments in the conflict. On the other hand, if the direction of travel leads to increased confidence that supply will not be targeted or otherwise put at risk, the market could revert to worrying solely about oversupply next year, sending Brent back under 70 \$/b and perhaps below September’s lows. Were that to happen, OPEC+ might be forced to accept that it can no longer delay the downturn in the cycle and the market will have to balance itself through the price falling to a level that disincentivises output. Because some OPEC+ members, such as Saudi Arabia, have very low production costs, their reaction to low prices can be to increase output to maintain revenues at lower prices, which tends to push prices lower still.
