OPEC+ Output Policy Could Be Key Theme for Oil Investing in 2025
Investors are putting OPEC+'s output policy under close watch, as global economies are navigating in a thicket of unknowns. The crude forward price curve has been in retreat and net long oil futures positions in decline despite the US Federal Reserve's rate cut and China's stimulus. An OPEC+ unwinding of supply cuts could risk shifting market balance, causing the WTI price to retest $70 in 1Q25.
1. OPEC+ Unwinding Cuts May Point to Surplus
Oil markets could face a surplus of 660,000 barrels a day during 2Q25 if global oil demand stays sluggish or Saudi Arabia and other major producers unwind voluntary production cuts in 2025. Meanwhile, US shale producers could keep cranking up output, and China's economic weakness may cause demand to drop faster than expected despite stimulus. Both factors might contribute to global oil-inventory build. Our model suggests inventory could continue to fall in 4Q24 but the downtrend might be reversed in 2025.
2. Geopolitical Tension Could Put OPEC Production at Risk
Though OPEC+'s plan to taper cuts could stoke risk of surplus supply, the Middle East's oil production may remain at risk as geopolitical conflict in the region intensifies -- an event that could cause a massive yet short-lived price swing. Any disruption in production from Iran, Iraq, Kuwait, the United Arab Emirates and Saudi Arabia due to the adverse turn in the confrontation between Iran and Israel could trigger such a spike.
3. Oil Curve's Shift Downward Reflects Demand Risk
The downward shift in WTI's price curve -- a 4% fall in front-month forward prices between Oct. 8 and Oct. 21 -- may signal bearishness toward oil's short-term supply-demand dynamics. Investors may be wary of the global demand risk more than the supply risk that Iran's attack on Israel could pose to the flow of shipments through the Strait of Hormuz, through which up to 30% of global oil shipments pass.
While an escalation of Iran-Israel tensions could stoke further anxiety over oil exports from the Middle East, oil's risk premium of only $3 above its $70 fair value, by our calculation, signals many in the market think the conflict could be short-term and regional.
4. Crude-Time Model Says Price Rally May Be Brief
Our crude-time spread model signals the market is pricing in risk of short-term oil-supply disruption, while remaining skeptical about the medium-term supply-demand balance. Crude spreads are inversely correlated to inventory. The oil-price curve shows less backwardation when stockpiles are rising, as buyers are less willing to pay a higher premium for immediate delivery. The 10-week average price spread between one-month and 60-month WTI futures was $6.41 during the week of Oct. 11 vs. $8.28 a month earlier, lower than the average premium of $15 per barrel based on previous experience.
Source : Bloomberg
