Brent Crude has fallen more than 15% since its July 4th peak, and HSBC predicts further declines in 2025.
November 19, 2024 - In a report released Tuesday, HSBC projected that OPEC+ will extend its current production cuts by an additional three months to April 2025, rather than increase output as originally planned from January 1, 2025. This move aims to prevent an oversupply of oil in the first quarter, typically a period of weaker demand.
OPEC+ had initially planned to phase out its voluntary production cuts of 2.2 million barrels per day starting in October. However, due to persistent low oil prices and concerns about weak demand and increasing supply, the group has already postponed the plan twice, now aiming for January 2025, with further delays possible. The next OPEC+ meeting is scheduled for December 1st, where the group will decide on its next production policy.
HSBC estimates that a three-month extension could offset some of the weak demand, but even with the delay, the oil market would still see an average surplus of 500,000 barrels per day in 2025, slightly lower than previous forecasts. Furthermore, the extension does not address the fundamental issue facing OPEC+: while the group is cutting production, non-OPEC countries are increasing theirs. HSBC forecasts Brent crude prices to remain at $70 per barrel in 2025 and beyond.
OPEC+ Could Delay Production Increases Even Longer
With WTI and Brent crude currently hovering around $70 per barrel, HSBC does not rule out the possibility of OPEC+ postponing production increases until later in 2025. The bank noted that OPEC+ might opt for several smaller extensions rather than a single six-month or one-year delay, allowing for greater flexibility.
If OPEC+ maintains production cuts throughout 2025, the oil market would be balanced, rather than experiencing a small surplus, aligning with the group's goal of maintaining market stability. In this scenario, oil prices could be higher than the forecasted $70 per barrel for 2025.
OPEC+ Still Lacks an "Optimal Exit Strategy"
However, extending cuts does not solve the fundamental problem facing OPEC+. While the group is reducing output to control market prices, other countries are increasing production, outpacing demand growth over the next two years. With demand growth already below historical trends, this means that when OPEC+ eventually decides to increase production, the market may already be adequately supplied, intensifying competition.
HSBC predicts that non-OPEC countries will increase oil supply by 1.3 million barrels per day in 2025 and 1 million barrels per day in 2026, while demand growth will only be 1.1 million barrels per day and 900,000 barrels per day, respectively.
OPEC+ Preparing to Adapt to Lower Oil Prices
HSBC believes that OPEC+ may have to brace itself for a prolonged period of lower oil prices. The group may prefer to gradually increase production to minimize market shocks, but this is not a perfect solution. With over 3 million barrels per day of spare capacity waiting to be deployed, not including the existing 6.4 million barrels per day, a significant influx of oil into the market could limit price increases.
Therefore, OPEC+ may need to accept lower oil prices for a longer duration. Oil-exporting countries in the Gulf region could cope with reduced oil revenue by borrowing and implementing strict spending controls.
