OPEC+ Passes on Oil Output Increase, Weighs the "Trump Effect"

By Clyde Russell
Friday, December 6, 2024

It was likely a fairly easy decision for OPEC+ to once again delay plans to increase oil output.

The soft state of global demand is by itself sufficient reason to justify the decision at this week's meeting of the group to defer winding back some of its production cuts until at least April.

But weak demand growth may be the least of OPEC+'s worries as the oil market is about to be hit with the return of Donald Trump and all the uncertainty and contradictory policies that may bring.

Trump's return to the U.S. presidency is likely to change the market dynamics for crude, but the problem is nobody really knows in what ways, and making decisions even trickier for OPEC+, which brings together the Organisation of the Petroleum Exporting Countries and allies including Russia.

The only thing that is completely clear from Trump's rhetoric is that he wants cheaper fuel prices for U.S. consumers.

To this end his arrival back in the White House on Jan. 20 should be bearish for crude prices.

Trump's administration is likely to ease regulations for the U.S. oil and gas industry in the hopes that this will lead to higher production.

It may well help boost U.S. natural gas output, especially if global demand for liquefied natural gas remains robust.

But there's more of a question mark around U.S. crude production, which is already at record levels and may hit capacity constraints.

It's also uncertain as to why U.S. oil companies would want to produce more oil if the impact of this is simply to lower prices.

It becomes a calculation if the additional barrels can increase revenue and profits even if prices weaken.

Some of Trump's other potential policies could have opposing effects on the crude oil market.

Widespread tariffs on U.S. imports could upend global flows if the measures extend to crude.

For example, tariffs on oil imports from Canada and Mexico could result in higher prices for U.S. consumers and lower profits for U.S. refiners, both of which are bearish for demand.

If other countries impose retaliatory tariffs, U.S. crude and product exports may be lower, which may be bullish for prices as it reduces global supply.

If Trump is successful in bringing peace to Ukraine and at least a ceasefire to the Middle East, this could be bearish for crude as it will potentially add more Russian barrels back into the market as well as lowering the risk premium.

But if Trump goes hard against Iran over its nuclear program and ramps up sanctions and their enforcement, it may be bullish for prices as it will be harder for the Islamic Republic to move barrels and may ramp up geopolitical tensions.

Overall, Trump is likely to be bearish for prices, probably not because U.S. output will increase but more likely because his policies will lower global economic growth.

ASIA DEMAND

It's not only Trump that OPEC+ has to ponder, it's the weak state of demand in Asia, the top-importing region that buys almost two-thirds of seaborne crude oil.

For the first 11 months of the year, Asia's crude imports were 26.52 million bpd, down 370,000 bpd from the 26.89 million bpd tracked by LSEG Oil Research for the same period in 2023.

The decline in imports stands in contrast to OPEC's most recent forecast for Asia's oil demand to expand by 1.04 million bpd in 2024 from the previous year.

Much of the decline can be blamed on China, the world's top oil importer, with OPEC and other analysts being wrong-footed by both the soft economy and the increasing structural shift to electric vehicles and LNG-powered trucks.

The trend toward electrification is likely to accelerate in China, and the chances are it will expand across Asia as China seeks new markets to exploit its leadership in EVs, batteries and solar panels.

Overall, OPEC+'s biggest dilemma is that it can only keep the oil price around $75 a barrel by extending its current deep output cuts of about a total of 5.86 million barrels per day.

But in doing so it effectively subsidises its rivals and gives them the first opportunity to grab any increase in global demand.

The views expressed here are those of the author, a columnist for Reuters.

(Editing by Stephen Coates)

Categories: People Offshore Energy Industry News Activity Production Oil & Gas

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