The global oil market in 2024 is anticipated to face a deficit, according to the latest report by the International Energy Agency. Initially, it expected to see a supply surplus in the second half of the year, but the agency revisited its forecast because it does not believe that OPEC+ members will abandon their strategy of production cuts aimed at bolstering prices. This threatens them with further market losses, as non-OPEC+ countries, primarily the United States, fill the gap left by untapped OPEC+ oil. Meanwhile, the development of new shale deposits in West Texas and New Mexico remains profitable at $60–70 per barrel of Brent crude, meaning that prices would need to drop to around $60 to halt this activity. However, the budget of Saudi Arabia for 2024 is balanced at $75, and the Russian budget at $85. In the short term, maintaining high prices, if unchanged, is expected to provide sufficient revenue for the Russian budget. Yet, in the medium term, it increases the risk of Saudi Arabia reclaiming market share from Russian oil, which is costlier and more politically fraught due to sanctions.
The Kremlin's ability to sustain its war efforts and maintain internal stability heavily relies on its oil revenues. This is well understood both in Moscow and in other capitals. In this regard, the situation in the oil market appears no less significant than the situation on the battlefield in southern Ukraine. Here, too, there is a developing plot, the outcome of which may affect the situation on the front.
In its latest report, published in March, the International Energy Agency unexpectedly revised its previous forecast: in 2024, instead of a surplus in the oil market, the agency now expects a deficit of 300,000 barrels per day. In its previous forecast, the IEA assumed that OPEC+ countries (primarily Saudi Arabia and Russia) would abandon production cuts in the second half of 2024. Now, however, the IEA believes that the cartel will not ramp up production. This is quite unusual, notes Bloomberg. Typically, the agency builds its forecasts based on official statements, which are currently lacking. The meeting where OPEC+ participants will decide whether to increase production is scheduled for June. In late February, Bloomberg Opinion columnist Javier Blas reported, citing sources within OPEC+, that some members of the organisation (which he does not specify) are pushing for increased production, suggesting they may do so even before June.
OPEC+ began cutting oil production at the end of 2022 to prevent global prices from falling amid a slowdown in the world economy caused by the war in Ukraine. Saudi Arabia and Russia made the largest cuts to production (→ Re: Russia: Oil to the Rescue), with a total of 2.2 million barrels per day. However, the impact was limited. The average Brent crude price in 2023 was $83 per barrel, down from $101 in 2022. Non-OPEC+ producers, primarily the United States, almost entirely offset the shortfall by increasing production by 1.5 million barrels per day to around 130 million (→ Re: Russia: OPEC Minus).
US oil production has steadily grown since the early 2010s, with the growth trajectory only faltering twice, in 2016 and 2020, when oil sharply declined due to global crises. A significant portion of this growth has come from shale development in the Permian Basin (West Texas and New Mexico), with their share in the total output increasing from less than 20% to nearly 50% over the past decade. The profitability threshold for launching new deposits in this region in 2024 is above $60 per barrel of Brent crude. Half of the companies surveyed by Jefferies Financial Group only break even at $70 per barrel, as reported by Bloomberg. Meanwhile, production at already operational fields remains profitable at much lower prices: the majority remain profitable even at $30-40. This creates a dilemma: launching new deposits at low prices is problematic, but already operational ones will continue production.
The strategy discussed by Blas in late February implied that OPEC+ decision-makers are refraining from further production cuts and, by sacrificing some income due to price declines, slowing the growth of drilling in new shale deposits in the United States. Should the price of Brent crude linger above $80 for an extended period, the cartel risks permanently conceding the market share it has already won. However, OPEC+ possesses the resources to reclaim surrendered positions. The IEA estimates the cartel members' spare capacities at 5.7 million barrels per day. Saudi Arabia could increase production by 3.1 million barrels per day, the UAE by over 1 million, Iraq by 0.4 million, and Kuwait by 0.3 million. The volume of spare capacity in Russia, which has kept its oil and gas production statistics classified, remains unassessed by the IEA.
Vladimir Putin recently addressed this dilemma, stating, ‘We earn more per barrel produced than if prices fell, but since production is declining while it is growing in other countries like the US, we may lose markets.’ Meanwhile, the Russian government has budgeted for $85 per barrel of Brent in 2024. Prices have only recently reached this level. In physical terms, Russian exports have reached their highest level since the beginning of the year, despite India reducing purchases due to sanctions, as calculated by Bloomberg based on Kpler data. The volume lost was taken up by China. For Saudi Arabia, reducing prices to the level necessary to undercut American producers would also be painful, note analysts at S&P Global: its budget balances at $75 per barrel.
Thus, in its report, the IEA effectively acknowledges that OPEC+ is unable to impose a fight for market share against the United States, accepting a decline in current revenues, and will adhere to the strategy of production cuts to maintain prices at their current levels. Following the IEA, the US Energy Information Administration (EIA) revised its estimates along the same lines. The forecasted average price of a barrel of Brent crude for 2024 has been raised from $82 to $87, and for 2025, from $79.5 to $85. This suggests that Russian budget revenues in 2024 are unlikely to decrease. At the same time, risks are increasing for the future. Saudi Arabia has an alternative strategy to regain its market share: by lowering prices, it could reclaim it from Russian oil, which is more expensive and politically fraught due to sanctions.