COMMODITIES 2025: OPEC+ confronts murky oil market fundamentals, geopolitics

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

OPEC and its allies head into 2025 much the same as last year, with the oil market outlook clouded by significant unpredictability around fundamentals.

This time, however, the pending presidency of Donald Trump adds another challenge as the OPEC+ alliance seeks to stabilize oil prices in what could be volatile geopolitics, when wars in Ukraine and the Middle East are already complicating oil flows.

Concerns over demand, particularly in China, have led OPEC+ to repeatedly delay plans to bring barrels back to the market as oil prices faltered in the second half of 2024, while rising inflation risks could also tamp down economic activity.

Meanwhile non-OPEC+ crude supply increases have eroded the group's market share and ability to impact prices.

"The general market consensus is for a strongly oversupplied oil market in 2025, which is likely the reason why market positioning is so low and prices are trading at the lower end of the 2024 trading range," Swiss investment bank UBS said in a note to clients.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $71.93/b Dec. 23 -- well below 2024 highs of over $93/b in mid-April. Current prices are also below fiscal breakeven oil prices for key OPEC+ decision makers including Russia and Saudi Arabia.

Policy dilemma

This puts OPEC+ in a quandary about what policy to prioritize in 2025. Sticking to current output cuts could further erode its market share, but bringing barrels back to the market could drive prices down to levels unacceptable to the group.

OPEC+ currently plans to gradually ease 2.2 million b/d of voluntary production cuts by eight countries from April, when it hopes demand will begin to perk up from the seasonal first quarter refinery maintenance period.

The UAE is also set to gradually increase its quota from April under a hard-won concession from the alliance. A further 3.6 million b/d of groupwide cuts are in place until the end of 2026.

A key nine-country OPEC+ monitoring committee, co-chaired by Saudi Arabia and Russia, is next expected to convene Feb. 1 to assess market conditions, with the full group scheduled to meet May 28.

Analysts with Commodity Insights said prices could slump to below $70/b if OPEC+ lifts its quotas and raises output.

"OPEC+ will find it difficult to increase supply at all in 2025 without notably weighing on prices since non-OPEC production growth is expected to be greater than total global oil demand growth," it said.

OPEC+ discipline

Quota compliance figures are to remain at the forefront of OPEC+ concerns, as any production leakage could further undermine the group's efforts to bolster prices.

Saudi energy minister Prince Abdulaziz bin Salman has wielded his position at the head of the OPEC+ Joint Ministerial Monitoring Committee to pressure counterparts -- particularly Iraq, Kazakhstan and Russia -- to curb their quota cheating, with varying degrees of success.

Members with quotas under the OPEC+ deal pumped 91,000 b/d above their collective targets in November, according to the latest Platts survey by Commodity Insights, which was an improvement on overproduction of 179,000 b/d in October.

Geopolitics could also impact the balance of production within the group, with many analysts forecasting that President-elect Trump could switch sanctions focus away from Russia toward Iran. Since Russia invaded Ukraine in February 2022, its crude production has fallen by 1.14 million b/d, according to the Platts OPEC+ survey.

Meanwhile Iran and Venezuela -- exempt from quotas under the OPEC+ production agreement -- have ramped up production by 660,000 b/d and 200,000 b/d, respectively. These volumes could fall back if the Trump administration applies more sanctions pressure, as many market watchers expect.

That, in turn, could allow space for other OPEC+ members to raise production and regain market share, though they have been wrongfooted before by Trump during his first term, when his issuance of Iran sanctions waivers undermined a Saudi-led OPEC+ decision to pump more crude.

Virtually all of the oil market's spare production capacity of around 5 million-6 million b/d is held by Saudi Arabia, the UAE and Kuwait.

Demand woes

But the unsteady demand growth picture will continue to challenge the OPEC+ alliance.

OPEC's own analysts have steadily revised down their global oil demand growth forecasts in the second half of 2024. The organization now expects demand to rise 1.6 million b/d in 2024 year over year, and another 1.4 million b/d in 2025, according to its latest monthly oil market report released Dec. 11. This is down from forecasts of 2.2 million b/d for 2024 and 1.8 million b/d for 2025 in its July report.

Other barrel counters are far less bullish, like the International Energy Agency, which sees demand growth of 840,000 b/d in 2024 and 1.1 million b/d in 2025.

Analysts at Commodity Insights forecast global oil demand growth of 1 million b/d in 2024 and 1.3 million b/d in 2025.

OPEC+ will be hoping their relatively bullish demand expectations come true, while rival supply disappoints -- all in a complex geopolitical environment.