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OPEC+ set to delay its production hikes until spring 2025

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

OPEC+ members are set to meet today (5 December) with the group firming up plans to postpone (for the third time) oil production hikes for another three months until April 2025. For months, OPEC+ has weighed whether to relax production cuts, currently keeping 2.2m b/d off the market, allowing members to pump more and reclaim market share. The motivation for delaying the sequencing of supply hikes beginning with 180k b/d currently set for January 2025 is predominantly three-fold. First, the price of Brent has remained in the low USD70s/b for over six weeks – well below most producers’ fiscal breakeven thresholds. Second, it will allow the group to avoid a potentially large surplus during the seasonally weak first quarter of the year – and offset some of the continued weakness in global oil demand. Third, it offers the space for OPEC+ to assess the state of the market and the impact of what seemingly will be front-loaded policy adjustments following the inauguration of president-elect Trump on 20 January. Ultimately, further delays do not solve the predicament for OPEC+ that there is little space in the medium-term to fully unwind its cuts and recover lost market share. What is clear is that despite the encouraging signs of improving compliance of production quotas by Iraq, Kazakhstan and Russia, as well as the likely extension of OPEC+ cuts until April 2025, the global market is dealing with an unresolved (0.9m b/d) surplus next year and high spare (~6m b/d) capacity levels which is bearish for oil prices. We maintain our USD73/b average Brent price forecast but recognise two-tail risks of breakouts in our USD65-80/b corridor on Trump-induced tariffs and/or geopolitical uncertainty.

Energy

The centrepiece of US Treasury secretary nominee Scott Bessent's “3/3/3” approach to policy – cutting the budget deficit to 3% of GDP, achieving 3% annual growth, and increasing domestic production by 3 million barrels of oil-equivalent a day (mboe/d) – matters profoundly for global energy markets. We view that a combination of LNG demand, capital discipline and our energy price forecasts could see the Bessent’s energy pillar ambitions come to fruition. US energy production has grown at a 1.8mboe/d annual average pace in 2018-23 (more than 2x the 0.75mboe/d pace consistent with 3mboe/d growth in four years) and we anticipate that US energy production rises by 3mboe/d in the first three years of Trump 2.0 – one year earlier than Bessent’s objective.

Base metals

Two obscure yet crucial base metals, gallium and germanium, are the latest pawns in the escalating US-China trade war, as China announced on 3 December an export ban on both metals to the US in a tit-for-tat move after the US administration implemented its own new technology curbs on the country. More broadly, base metals have advance to our second most preferred long commodity convictions in 2025 (after gold). While a major factor underlying the overall decline in oil prices is improving supply conditions, base metals like copper and aluminium are facing the opposite problem with constrained supply setting the stage for stronger projected prices later in 2025.

Precious metals

Gold continues to take its cues from market pricing for the Fed funds rate, and those correlations suggest that bullion is biased lower near-term. Yet, equally, gold is a natural Trump trade to hedge against bear steepening that reflects restoked inflation pressures, fiscal deficit spending concerns as well as tariff-driven geopolitical tensions. More broadly, gold’s unshakable bull market and into 2025 it remains our most constructive conviction for the second consecutive year, reinforced by a combination of “fear” (geopolitical hedge of first resort) and “wealth” (EM central bank demand) dimensions.

Bulk commodities

Iron ore is under pressure after major exporter Vale declared that it plans to sell more lower quality products as steel margins tighten. The next key catalyst for bulk commodities will come between 11-12 December when China will start its annual closed-door Central Economic Work Conference (CEWC) to map out economic targets and stimulus plans for 2025.

Agriculture

China’s corn prices have fallen to their lowest level in more than four years, as large volumes of low grade grain flooded the market after poor weather damaged the quality of the new harvest.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.