Middle East Conflict, OPEC+linked Hopes Prevent Sharp Oil Correction

Notwithstanding concerns surrounding a wider Middle East war, which could disrupt oil flows from the region, China stimulus disappointment and OPEC+ producer plans to bring barrels back in the coming months have put the crude oil market at risk of a sharp correction. The pending surplus in early-2025, stemming from lackluster global demand and robust supply growth, may well see crude oil price trade significantly below current levels in 2025.

OPEC+ production cuts may become unnecessary

The extension of the current OPEC+ production suppression regime, which features significant member overproduction, does not look to be sufficient to keep the market in balance next year. In the absence of the current war premium, the markets will likely need to see OPEC+ comply with production quotas and further delay the unwind of production cuts in order to prevent a drift into a $50-60/b range.

With non-OPEC+ production projected to jump by some 1.5m b/d and demand growing by just under one million b/d, the current inventory levels suggest that some 500k b/d of reduction from current production levels is required to preserve a rough market balance and prevent a drop lower.

The risk of a broader Middle East conflict, which could see oil supplies from the region disrupted as tanker traffic through the Straits of Hormuz and flows from Gulf States slow sharply, could well make OPEC+ production cuts unnecessary. Indeed, if tanker and pipeline flows from the region are interrupted due to military attacks, shortages may quickly materialize, with prices hitting triple digits for a prolonged period.