Oil’s hot summer is coming to an end, posing risks for Big Oil and OPEC+

Since nearing $90 a barrel in early July, oil futures have lost more than 10% as China’s faltering economy and expectations of a flood of new supplies from the Americas overshadowed U.S. demand in the summer and geopolitical tensions in the Middle East. Rising fuel production capacity is eroding the huge gains of refinerieseroding its crude oil purchases.

Having been stuck in a range of $75 to $90 a barrel for most of the year, the direction of prices will now be heavily influenced by the OPEC+ cartel led by Saudi Arabia and Russia. The group faces an imminent decision on whether to revive dormant prices. production in a market that does not seem to need additional production.

“There are negative expectations of a supply glut,” said Christof Ruehl, a senior analyst at Columbia University’s Center on Global Energy Policy. “Demand has stabilized at a lower level and supply is booming everywhere. There will be a negative impact on prices if OPEC+ ends the cuts.”

At stake are not just the group’s revenues but also the profits of oil majors such as BP Plc and Shell Plc, as well as the generous returns they promise shareholders in the form of share buybacks and dividends. BP shares fell to their lowest level in two years on Aug. 22, despite its pledge to buy $3.5 billion of stock this year.

While this represents a headwind for oil, gasoline futures trading near six-month lows will provide central banks with room to maneuver as they assess whether they can continue cutting interest rates because their battle against inflation is won.

Earlier this summer, when market prospects were brighter, the Organization of the Petroleum Exporting Countries and its partners laid out a provisional — and reversible — plan to restore 543,000 barrels per day of suspended production during the fourth quarter, while gradually reactivating supplies halted since late 2022.

But since then, the demand outlook has darkened. Even if OPEC+ cancels the scheduled increases, global markets According to the International Energy Agency, the next quarter will soften as the rapid depletion of inventories currently underway ceases. Next year looks even shakier, with a surplus of more than a million barrels a day in the first quarter, even if OPEC+ does not open the tap, it predicts.

“Non-OPEC supply growth will largely cover overall demand growth,” Spencer Dale, chief economist at BP Plc, told reporters this week. “That means the scope for OPEC “Capacity recovery is likely to be relatively limited.”

In China, the largest oil importer, overseas purchases have fallen at the weakest pace in nearly two years amid the economic crisis and a shift to less carbon-intensive fuels. Its refineries are cutting output, eroding its crude consumption.

India’s rising demand for diesel fuel, another key driver of consumption growth, is also stagnating as fuel efficiency improves and the electrification of the country’s railways. Globally, manufacturing is contracting again after six months of expansion, according to data from JPMorgan Chase & Co.

“Given that we are now at year-to-date lows, one could argue that we have already overshot the exchange rate,” said Saad Rahim, chief economist at the trading giant. Trafigura Group“But if we continue to see weak demand in China and we get the counter-seasonal crude increases in September, that will likely weigh further on prices.”

Bloomberg

All of this is making mainstream oil watchers increasingly bearish. OPEC+ risks inflicting a “bearish surprise” if it goes ahead with the increases, according to veteran bearish Citigroup Inc., which sees crude oil prices falling to $55 a barrel next year. DNB Bank The ASA also warned that prices could fall to $60 if the coalition goes ahead with its plans. Goldman Sachs Group Inc. sees downside risks in the likely range of $75 to $90 a barrel next year.

Riyadh, which has seen its oil revenues fall to a three-year low, has said it can “pause or reverse” increases if necessary, leaving traders divided over whether the alliance will go ahead.

Some are questioning how much further prices can fall, given that speculators have already piled on huge bearish bets and conflict continues in the Middle East, which accounts for about a third of global supplies.

Earlier this month, speculators placed the fewest net bets on higher prices since Intercontinental Exchange Inc. began publishing data in 2011. In such settings, bullish surprises can have an outsized positive effect on prices.

There are some bright spots in the US, too. Domestic crude stockpiles are at their lowest level since January and inventories at the Cushing, Oklahoma, storage hub are also continuing to decline. But that could be reversed as some major US refiners prepare to cut their processing rates this quarter.

High prices in recent years have financed a wave of new supply from large producers outside the OPEC+ cartel.

Production is rising in Canada (which now pumps more oil than any other OPEC producer except Saudi Arabia) and Guyana, which has increased its output to 700,000 barrels a day from zero just a few years ago. A handful of new oil producers are expected to emerge later this decade.

And the cartel faces an internal challenge: Two member countries under sanctions — Iran and Venezuela — have ramped up production, collectively exporting 3.3 million barrels a day over the past three months, according to data intelligence firm Kpler. That’s the most since May 2019.

“OPEC will face difficult decisions,” said Henning Gloystein, director of energy, climate and resources at Eurasia Group“Increasing barrel volumes in an environment characterized by low demand growth and potential macroeconomic headwinds is risky, particularly when non-OPEC supply growth is expected to pick up.”