CIO continues to recommend risk-taking investors add long exposure via longer-dated Brent contracts, which are trading at a discount to spot prices, or to sell Brent’s downside price risks. (UBS)

Reuters, citing unnamed sources, reports ministers are being asked to consider cuts of between 1 to 2 million barrels per day—a higher figure than previously reported in the Financial Times and Wall Street Journal. A later Reuters report suggested OPEC+ nations had reached a preliminary agreement for an additional oil output cut of more than 1 million barrels a day.


The prospect of deeper cuts has helped crude prices extend their recent recovery, with Brent now up around 9% from its mid-November lows. While we are publishing this ahead of the OPEC+ producer decision, we think the sell-off in crude has been overdone and we see further scope for a price recovery from here:


At a minimum, we think Saudi Arabia and Russia are likely to roll over their voluntary cuts. The OPEC+ summit was rescheduled from last week amid media reports of discord over some quotas, and Reuters reports there is a chance the group could yet fail to agree on the deeper cuts. The group wants to keep the oil market in balance, in our view, and we expect at a minimum that the overall quotas, and voluntary Saudi and Russian supply cuts will be extended into 2024. Deeper cuts in the order of 1 to 2 million barrels for the group would likely support crude prices—with 1 million barrels corresponding to around 1 percentage point of global demand.


The oil market is undersupplied, in our view. Global oil inventories continued to fall in October, with the International Energy Agency showing a drop of more than 55 million barrels in on-land oil inventories, relying on official data and satellite tracking. China, the world’s largest global importer, has stepped up stimulus measures—with stronger growth likely to boost energy demand. In October, China’s crude imports were up 13.5% on the prior year, and 3.6% on the month. Oil consumption in India is also rising. Looking at the year ahead, the latest forecast from OPEC is for demand to grow by more than 2 million barrels a day in 2024. The International Energy Agency is forecasting a more conservative growth path of 930,000 barrels a day.


The risk of disruption to oil production arising from the Israel-Hamas war has not gone away. Steps toward a ceasefire are encouraging, and our base case is that the conflict will not escalate to the broader region. However, events in the region remain fluid. The clearest threat is to Iranian output. Should Iranian crude exports fall by around 300,000–500,000 barrels per day, this could further constrain the already under-supplied market, potentially pushing Brent prices up to USD 100–110/bbl until other OPEC+ producers step in to compensate. A broadening of the conflict across the region that pulled in other oil-producing countries could cause prices to rise even more, depending on the magnitude of the disruption. Against this backdrop, oil retains a hedging value in portfolios.


So, while near-term prices could remain volatile, we remain positive on crude and expect prices to trade between USD 90 and USD 100 a barrel into year-end, amid still rising global demand and tight supplies. We continue to recommend risk-taking investors add long exposure via longer-dated Brent contracts, which are trading at a discount to spot prices, or to sell Brent’s downside price risks.


Main contributors - Solita Marcelli, Mark Haefele, Giovanni Staunovo, Wayne Gordon, Dominic Schnider, Jon Gordon


Read the original report : Crude pessimism looks overdone, 30 November 2023.