IE week and waiting for the OPEC+ announcement

We keep the short-term view (the coming week) from last week’s Energy Market Drivers that there are upside risks to the oil price. OPEC+ is expected to announce an extension of the voluntary production cuts into Q2. It is likely consensus in the market, but it still removes the risk that OPEC+ would not reach an agreement and is therefore supportive of oil prices. 

We stick to our view from the last couple of weeks that oil prices will continue to rise in the medium term and see prices in the mid to high 80ties later in the spring and summer months. 

If we see an extension into Q2, we expect it to add more support to oil, and a more sustainable move to the mid-80s is likely. 

The chart below shows the IEA’s call on OPEC for the next three quarters. Hence, given that the January production of 26.6 mb/d is kept unchanged, OPEC should be able to tighten the market in Q2 and notably in Q3.

I spent most of this week in London for the IE week, engaging with clients and colleagues and attending various events and conferences. It isn’t easy to give a fair representation of the views I was presented with. But anyway, here are my unscientific highlights and takeaways from the IE week from an analytical point of view.

OPEC+ policy: OPEC+’s voluntary cuts of 2.2 million barrels per day will continue until at least Q2 and possibly Q3 this year.

Price outlook: Brent is expected to remain stable or slightly higher for the rest of 2024. Demand will increase seasonally, and the OPEC+ cuts will help offset the impact of rising non-OPEC supplies. Oilprice volatility will tend to be low.

OPEC cooperation: Angola has left the OPEC, and OPEC/OPEC+ is losing market share, notably as Saudi Arabia takes on more responsibility. Given the rapid growth of non-OPEC+ production and muted demand growth, it’s uncertain whether this is sustainable. Hence, 2024 could mark the beginning of the end for OPEC. However, no one seems to forecast any big disagreements this year. But 2025 and 2026 will likely be much more challenging for both OPEC and OPEC+.

US crude oil production: The EIA predicts that US oil production will stabilise around current levels. However, mergers and acquisitions activity in the industry and efficiency gains suggest higher output in 2024. I think the outlook for US crude oil production is where market analysts have the most disagreements.

Green transition: We have many shipping clients, and green fuels and new green regulations remain very high on the agenda. Will there be enough green fuels for the transition? What will be the winning fuel, or are we heading for a world with many new competing fuels? What will be the impact of regulation?

Geopolitics: In geopolitics, the focus is turning back to Russia, the need for stricter sanctions for them to have an impact, and the effect of the Ukranian attacks on Russian refinery infrastructure. The Red Sea closure is now a part of daily life, and the market seems to have adapted.

Overall, I was slightly surprised about the amount of “consensus” among analysts, colleagues and clients. If we look at implied volatility in oil it has continued to drop this year. Hence, the market seems to share the view that 2024 will be a year of low volatility. However, I am not sure sailing will be this smooth in 2024. When we head towards summer, the combination of OPEC+ cuts, seasonal demand pick-up, and a global manufacturing recovery might pose an upside risk to oil. On the other hand, the market might have become too complacent about China and the risk of OPEC+ cooperation breaking down. In any case, it’s difficult to predict what will happen. Currently, Brent is trading at USD 83.1, and the futures price is USD 78.53 by the end of 2024. I believe it will be closer to USD 85 by the end of 2024.

We have seen a strong spike in coal prices in the last two weeks. The API2 1M forward contract has moved from around USD 90 MT on February 20 to EUR 105 MT currently. Coal jumped as the US presented a new package of sanctions on Russia. Notably, two of Russia’s largest coal exporters Suek and Mechel will be sanctioned. There is already a ban on Russian coal in the EU but the impact will still be felt as it impacts the world market price.

The higher coal prices have impacted other energy prices, and we have seen a recovery in gas, power and EUA prices. TTF front-month is above EUR 25 MWh, German cal-25 is at EUR 75.80 Mwh after trading below EUR 70 two weeks ago and the DEC-24 EUA contract is above EUR 56 MT after trading close to EUR 52 the week before.

The weather forecast is relatively mild for the next, and the temperatures are moving above normal. It could speak in favour of a new price setback, but we might have seen the lows for now. In general, we believe consumers should cautiously start scaling into gas, power, coal and EUA hedges.

OPEC/OPEC+ will be in focus next week as the market awaits the expected announcement regarding a possible extension of the 2.2 mb/d voluntary production cuts. As discussed in this note, we expect an extension of the cuts that could push Brent towards the mid-80s.

Inventory data remain in fashion, and Wednesday’s usual DOE data can potentially move oil markets. This week, we saw another rise in US crude oil inventories of 4.2 million barrels. But note that the higher crude oil inventories are primarily due to refinery maintenance resulting in low refinery utilisation. When refineries return online, crude demand will pick up and the supply of products should increase.

Regarding critical economic data, the calendar in the US is packed with data. We will focus on the February labour market report on Friday. But the JOLTs and ADP data are also important indicators for the US labour market.

The commodity market will also focus on the Chinese government and its new growth target for the year. The market expects a repeat of the 5% growth target for 2023. More important is if new initiatives are introduced to support the Chinese economy.

Finally, we will have the ECB meeting on Thursday. No change is expected. We will also get the new staff forecast that can give some guidance on the timing of the first ECB rate cut. The market has pencilled it in June.

Notably, for the EUA market, the focus remains on the EEX auctions and the so-called cover ratio that we see as an indicator for underlining EUA demand. Last week, the speculative position data (published every Wednesday) showed that speculative accounts added to short posutions in EUAs.

Table 1 on the next page summarises our market views and hedging recommendations in our different markets.

We maintain our long-held view that Brent prices below USD 80/bbl offer an attractive entry level for new consumer hedges for 2024, notably as the global growth outlook has improved. Hence, add to the hedge ratio if we see a setback in Brent below USD 80/bbl. The risk is growing that Brent has already moved to a higher trading range. 

Hence, even after the recent move higher in various oil products, we still recommend that consumers have a hedging ratio above their individual company benchmark. The backwardation in the oil product curves is a positive feature from a consumer hedging perspective. Read more about backwardation in last week’s issue of Energy Market Drivers. 

Power, gas, and EUA prices might fall further in the spring, creating more attractive entry levels for new consumer hedges. However, prices have come off quite a bit, and much positive news is now priced in. It is time cautiously to scale into consumer hedges.

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