Despite worries about the turmoil in the Middle East, oil prices have stayed stable due to the possibility of increased supply. But according to the World Bank, an oil oversupply will cause oil prices to drop to a five-year low in 2025. In 2025, the World Bank projects that the world’s oil supply will surpass its demand by 1.2 million barrels per day.
Several non-OPEC+ nations are anticipated to boost production, and OPEC+ has a sizeable amount of spare capacity. China’s manufacturing activity has decreased, and the country’s oil demand has stagnated. Oil demand growth has been slower than anticipated globally, especially in China.
Lets Explore with the Steady Oil Rise, how the world Looks towards Middle East Supply
Comprehending the Current scenario
The possibility of more middle east supply has outweighed worries that the Middle East crisis would affect exports. When news broke that Israel would not strike Iran’s energy infrastructure, concerns over supply interruptions subsided.
Since the beginning of the week, oil prices have increased by more than $5 a barrel due to growing concerns that Israel might attack Iran’s energy infrastructure. Many market watchers have been taken aback by the recovery, which puts crude futures on course for gains of about 8% so far this week. This is because the surge seems rather muted given the stakes.
Given that the consequences might impede oil flows from the major exporting region, energy analysts have questioned whether oil markets are being overly complacent about the prospect of a Middle East conflict that is getting worse affecting the middle east supply. One of the biggest participants in the world oil market is Iran, a member of OPEC. According to estimates, Israel targeting Iran’s oil facilities may jeopardize up to 4% of the world’s supply. A prolonged decline in Iranian production, according to Goldman Sachs, restricting the middle east supply, may push oil prices up $20 per barrel, while the Swedish bank SEB has cautioned that in the worst case, crude futures might spike to above $200 per barrel.
According to some observers, reduction in the middle east supply led to the short oil market is the reason why crude prices haven’t increased more. This is a trading technique where an investor aims to make money in the event that an asset’s market value drops.
A number of OPEC+ nations declared on November 30 that they will be expanding and continuing their voluntary cuts, which now total 2.2 mb/d. This included Russia’s enhanced cut of 0.5 mb/d and Saudi Arabia’s continuous 1 mb/d cut. The OPEC+ alliance had 5.1 million barrels per day (mb/d) of spare capacity as of November 2023, which is around 5% of the world’s consumption.
OPEC + declared in June 2023 that the voluntary production restrictions, which were originally scheduled to end in December 2023, will continue until December 2024. Additional cutbacks of 1 mb/d by Saudi Arabia starting in July and 0.3 mb/d by Russia starting in October were part of this prolongation. The prolongation of these cuts beyond the first quarter of 2024 was further reaffirmed in the announcement made in November. In 2023, production in non-OPEC+ nations has been strong since the United States, Brazil, Guyana, and the Islamic Republic of Iran have increased production, nearly offsetting OPEC+’s output cuts. Although it varied amongst shale gas producers, the U.S. supply grew by 5% (y/y) between 2023Q1 and Q3.
The largest quarterly production was recorded in the third quarter of 2023, surpassing the previous record set in 2019Q4 prior to the pandemic. In 2024, the United States is predicted to lead the worldwide supply growth, with Brazil, Guyana, and Canada following closely after.
During the first nine months of the year, oil demand in EMDEs rose by 2.3 mb/d, but it was largely unchanged in advanced economies. A number of factors, particularly the ongoing recovery in transportation activities, have contributed to China’s surprisingly robust demand. It projected that around 75% of the rise in oil demand in 2023 will come from China.
As a result of the delayed effects of tighter monetary policy in advanced nations, global oil consumption is predicted to increase by 2% in 2023 to reach an all-time high of 101.7 mb/d and then decline to less than 1% in 2024.
Given that one-third of the world’s seaborne oil traffic occurs in the Middle East, the most recent conflict there has increased geopolitical risks for commodity markets, naturally affecting the middle east supply.. Even if it is a fading prospect, a conflict escalation might cause significant interruptions to the oil supply, depending on its length and scope. The prognosis for the oil market also has a number of upside risks, such as the potential for Russia and Saudi Arabia to increase or prolong their production cuts.
There is a chance that the U.S. shale oil industry won’t be able to fulfil the output increases anticipated in the prediction, particularly by 2025, despite the recent spike in oil production. The main cause of downside threats to oil prices is a poorer-than-expected performance of the world economy, especially from China. Together, these elements influence the intricate dynamics of the oil market in the face of geopolitical unpredictability. With the situations stabilizing steadily, the middle east supply may rise steadily addressing the global demand.
