Crude Oil Markets Face Pressures from Delayed Production Hikes and Weaker Demand

Key Highlights

• Price Trends: Crude oil prices saw marginal declines, with Brent at $72.02 (-0.10%) and WTI at $68.28 (-0.03%) due to delayed OPEC+ production increases.
• Supply Adjustments: OPEC+ postponed production hikes to April 2025 and extended gradual output restoration until 2026, slowing market surplus reduction.
• Global Demand Dynamics: China's demand fell (-5.4% y/y in October), while US nonfarm payrolls and consumer sentiment showed resilience, balancing bearish and bullish factors.
• Geopolitical Risks: Escalating tensions in the Ukraine-Russia conflict supported prices but were outweighed by surplus projections and growing non-OPEC supply.

Price Movements: Multi-Week Lows Amid Surplus Fears

• Crude oil futures traded marginally lower on Saturday morning after OPEC+ delayed plans to increase production output by three more months.
• February Brent oil futures were at $72.02, down by 0.10 per cent, and January crude oil futures on WTI (West Texas Intermediate) were at $68.28, down by 0.03 per cent.
• December crude oil futures were trading at ₹5797 on Multi Commodity Exchange (MCX) during the initial hour of trading on Friday against the previous close of ₹5805, down by 0.14 per cent, and January futures were trading at ₹5787 against the previous close of ₹5798, down by 0.19 per cent.

OPEC+ Supply Strategy: Delayed Increases Through 2026

• Today's global economic news was mixed for crude prices. On the negative side, the US Nov unemployment rate unexpectedly rose +0.1 to 4.2%, showing a weaker labor market than expectations of no change at 4.1%.
• Also, German Oct industrial production unexpectedly fell -1.0% m/m, weaker than expectations of +1.0% m/m. Conversely, US Nov nonfarm payrolls rose +227,000 stronger than expectations of +220,000. Also, the University of Michigan US Dec consumer sentiment index rose +2.2 to an 8-month high of 74.0, stronger than expectations of 73.2.
• Crude found support Thursday after OPEC+ pushed back a planned hike of its crude production by +180,000 bpd from January to April and said it would unwind its crude output cuts at a slower pace than planned.
• Also, the United Arab Emirates (UAE) said it will delay the planned 300,000 bpd increase in its crude production target from January to April. OPEC+ had previously agreed to restore 2.2 million bpd of output in monthly installments between January and late 2025. However, that is now pushed back until September 2026. OPEC Nov crude production rose +120,000 bpd to 27.02 million bpd.
• A decline in crude oil held worldwide on tankers is bullish for oil prices. Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least seven days fell by -2.5% w/w to 68.74 million bbl in the week ended November 29.
• Escalation of the Ukraine-Russian war is supportive of crude prices. Russia launched a new hypersonic missile into the city of Dnipro late last month, following Ukraine's expanded use of Western-provided long-range missiles against targets inside Russia, and Russian President Putin warned that Russia could strike “decision-making centers” in Kyiv with ballistic missiles.
• Last week, Putin also approved an updated nuclear doctrine that expands the conditions for Russia to use atomic weapons, including in response to a conventional attack on its soil.

Global Demand Shift: China's Weakening Appetite

• Crude demand in China has weakened and is a bearish factor for oil prices. According to data compiled by Bloomberg, China's Oct apparent oil demand fell -5.4% y/y to 14.07 million bpd, and Jan-Oct apparent oil demand was down -4.03% y/y to 14.00 million bpd. China is the world's second-largest crude consumer.
• An increase in Russian crude exports is bearish for crude. Weekly vessel-tracking data from Bloomberg showed Russian crude exports rose by +570,000 bpd to 3.36 million bpd in the week to December 1.
• Wednesday's EIA report showed that (1) US crude oil inventories as of November 29 were -5.0% below the seasonal 5-year average, (2) gasoline inventories were -4.3% below the seasonal 5-year average, and (3) distillate inventories were -4.8% below the 5-year seasonal average. US crude oil production in the week ending November 29 rose +0.1% w/w to a record 13.513 million bpd.
• Baker Hughes reported last Wednesday that active US oil rigs in the week ending November 29 fell -2 rigs and matched the 2-3/4 year low of 477 rigs first posted in the week ending July 19. The number of US oil rigs has fallen over the past two years from the 4-1/2 year high of 627 rigs posted in December 2022.

Geopolitical and Economic Drivers: Mixed Impact on Crude

• Crude oil and gasoline prices today are moderately lower, with crude posting a 2-1/2 week low and gasoline posting a 2-month low. A stronger dollar today is bearish for energy prices. Crude prices are also under pressure from a report from Macquarie Group that projects a "heavy surplus" next year of more than 1 million bpd as non-OPEC supply growth makes up for any supply restraints from OPEC+. Limiting losses in crude was better-than-expected US economic reports on Nov payrolls and Dec consumer sentiment, supportive factors for energy demand.