OPEC+ faces a very challenging situation, requiring either a significant increase in global oil demand or a sharp decline in non-OPEC production to bring their spare capacity back into the market. However, the likelihood of either of these scenarios occurring is low. Consequently, it appears improbable that OPEC+ will have the opportunity to utilize its existing spare production capacity in the foreseeable future.

Year-on-year, global oil product demand growth currently stands at approximately 2.2 million barrels per day (Mbd). Historically, this represents a substantial increase in demand. However, when we examine China’s year-on-year demand growth, it is about 2 Mbd. This implies that the rest of the world, excluding China, has seen minimal growth in oil demand over the past year, despite strong economic activity and on-shoring trends. It’s worth noting that China alone accounts for 90% of the demand growth this year, compared to 50 to 70% before the COVID-19 pandemic.

Assuming a soft landing, as suggested by the market consensus, it’s reasonable to expect similarly limited demand growth outside of China in the coming year, essentially non-existent. Therefore, the focus shifts to forecasting Chinese demand over the next 12 months.

On one hand, there is potential for increased international travel, which could result in an additional 300-500 Kbd in demand. On the other hand, some of the pent-up demand related to COVID-19 may subside, suggesting that the post-COVID effects are largely behind us. Consequently, China is likely to align more closely with its historical relationship to GDP.

In the period from 2015 to 2019, a 6.5% annual GDP growth in China corresponded to a 500 Kbd increase in oil demand per year. If we assume that China achieves its official 5% GDP growth target, it suggests a demand growth of approximately 380 Kbd for the coming year. However, if we account for some decarbonization effects, which were less prominent in the 2015-2019 period, an additional 350 Kbd of oil demand from China would be quite remarkable. Overall, this leaves global demand growth at around 500 Kbd.

On the supply side, non-OPEC oil production is currently increasing at a rate of 1 to 1.5 Mbd and is expected to continue doing so in 2024-25. In other words, supply is likely to gradually outpace demand by 0.5-1 Mbd annually under a central soft landing scenario. In a worst-case hard landing scenario, where oil demand contracts by 2.5 Mbd, there could be a surplus of at least 3 Mbd in the market. Even with the best possible cooperation within OPEC+, it’s improbable that the group could implement cuts of such magnitude. In an extreme scenario, OPEC+ might manage to cut another 0.5 to 1 Mbd, at best neutralizing the soft landing scenario and postponing the surplus problem to 2025.

Additionally, some OPEC producers, like the UAE and Iraq, have ambitious production targets and may find prolonged production constraints untenable. There’s also the unique case of Iran’s return to the official export market, with Tehran aiming to export an additional 500-800 Kbd of crude oil in the next six months.

In summary, the combination of ample spare capacity within OPEC+, favorable prices for non-OPEC producers, sluggish demand growth, and potential discord among key OPEC producers suggests that oil prices are likely to normalize lower, approaching pre-summer rally levels around $75 per barrel. In the event that the soft landing scenario deteriorates into a hard landing, prices could decline further, potentially compelling non-OPEC producers to cut their production, but this action would likely only be triggered if prices fall below $50 per barrel.