Without geopolitical risks, there is potential for oil prices to decline

• Despite strong expectations for crude oil prices to rise in recent weeks, a very different scenario has unfolded in the energy commodities landscape.
• The OPEC+ production cut has impacted global oil inventories, with Saudi Arabia leading the efforts through voluntary cuts of 1 million barrels per day.
• However, in a scenario of difficult cooperation among its members, more oil could return to the market, resulting in a bearish trend for 2025. Not only is OPEC+ increasing its production capacity, but other countries, such as Brazil, Canada, the U.S., and Guyana, are also contributing.
• On the macro front, additional labor market data is adding uncertainty regarding the next interest rate cut in the U.S., which could give support to the dollar and affect future demand for crude oil.

In recent days, the price of oil has seen an impressive recovery, with the market pricing higher risk premium due to the conflicts between Iran and Israel. The Middle East, a region home to major oil producers, has been a significant source of volatility for the energy complex.

However, looking at the supply and demand dynamics, there are bearish fundamentals that could gain strength in the coming months. There is significant spare capacity among OPEC countries, which may bring higher oil volumes to the market starting in December. China continues to add uncertainty regarding energy consumption growth for 2024 and 2025, while U.S. labor market data casts doubt on the pace of interest rate cuts in the world's largest economy, among other factors.

Therefore, in this report, we will discuss the potential correction in oil prices if no substantial damage to oil production and exports in the Middle East materializes.

As we mentioned in a previous report, the OPEC+ production cut policy has been a major driving force in the energy complex, exerting significant pressure on global oil inventories. Saudi Arabia, one of the world's largest oil exporters, has been a key player in this strategy, with voluntary cuts of 1 million barrels per day.

On one hand, the strategy has succeeded in keeping prices at higher levels, but on the other, it has come at a significant cost in terms of volume for Saudi Arabia, which has seen its market share shrink since last year. Not only have non-OPEC members gained more market share during this period, but so have OPEC members that have not fully complied with the cuts, such as Iraq, Kazakhstan and Russia.

In a scenario of difficult cooperation among its members, OPEC+ is preparing to gradually ease its production cuts, allowing more oil to return to the market. If cooperation among members weakens further, Saudi Arabia — which has borne the highest cost in terms of volume under the current production policy — could opt for a market share war, increasing bearish risks for the oil complex and its derivatives.

If the oil market fundamentals already pose significant risks to the energy complex, the macroeconomic front is adding further uncertainty. The Federal Reserve (Fed) cut interest rates by 50 basis points in its last meeting, citing concerns about the labor market. However, the latest payroll data suggests the economy is still performing well, with 100,000 more jobs than expected. If inflation does not show signs of easing in October, it is highly likely that the FOMC will opt for a smaller interest rate cut, which could strengthen the dollar and impact demand for commodities.

Analyzing the current context, oil prices to maintain their gains would depend on a bigger escalation of the ongoing conflict in the Middle East (which has not occurred so far) which would lead to significant damage to the region's energy infrastructure causing a supply disruption. While this possibility is small, it would represent a major bullish push for prices.

Without the realization of these risks, the price of oil and other derivatives may see a correction in the coming weeks, especially during the maintenance season in the U.S.