Oil could plunge to $40 in 2025 if OPEC unwinds voluntary production cuts, analysts say

Wednesday at 03:38 AM

A pump jack in Midland, Texas, US, on Thursday, Oct. 3, 2024.

Anthony Prieto | Bloomberg | Getty Images

Oil prices may see a drastic fall in the event that oil alliance OPEC+ unwinds its existing output cuts, said market watchers who are predicting a bearish year ahead for crude.

“There is more fear about 2025’s oil prices than there has been since years — any year I can remember, since the Arab Spring,” said Tom Kloza, global head of energy analysis at OPIS, an oil price reporting agency.

“You could get down to $30 or $40 a barrel if OPEC unwound and didn’t have any kind of real agreement to rein in production. They’ve seen their market share really dwindle through the years,” Kloza added.

A decline to $40 a barrel would mean around a 40% erasure of current crude prices. Global benchmark Brent is currently trading at $72 a barrel, while U.S. West Texas Intermediate futures are around $68 per barrel.

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Oil prices year-to-date

Given that oil demand growth next year probably won’t be much more than 1 million barrels a day, a full unwinding of OPEC+ supply cuts in 2025 would “undoubtedly see a very steep slide in crude prices, possibly toward $40 a barrel,” Henning Gloystein, head of energy, climate and resources at Eurasia Group, told CNBC.

Similarly, MST Marquee’s senior energy analyst Saul Kavonic posited that should OPEC+ unwind cuts without regard to demand, it would “effectively amount to a price war over market share that could send oil to lows not seen since Covid.”

However, the alliance is more likely to opt for a gradual unwinding early next year, compared to a full scale and immediate one, the analysts said.

Should the producers group proceed with their production plan, the market surplus could nearly double.

Martoccia Francesco

Energy strategist at Citi

The oil cartel has been exercising discipline in maintaining its voluntary output cuts, to the point of extending them.

In September, OPEC+ postponed plans to begin gradually rolling back on the 2.2 million barrels per day of voluntary cuts by two months in an effort to stem the slide of oil prices. The 2.2 million bpd cut, which was implemented over the second and third quarters, had been due to expire at the end of September.

At the start of this month, the oil cartel again decided to delay the planned oil output increase by another month to the end of December.

Oil prices have been weighed by a sluggish post-Covid recovery in demand from China, the world’s second-largest economy and leading crude oil importer. In its monthly report released Tuesday, OPEC lowered its 2025 global oil demand growth forecast from 1.6 million barrels per day to 1.5 million barrels per day.

The pressured prices were also conflagrated by a perceivably oversupplied market, especially as key oil producers outside the OPEC alliance like the U.S., Canada, Guyana and Brazil are also planning to add supply, Gloystein highlighted.

Bearish year ahead for oil

The market consensus is that there’ll be a “substantial” oil stock build next year, said Citibank energy strategist Martoccia Francesco.

“Should the producers group proceed with their production plan, the market surplus could nearly double… reaching as much as 1.6 million barrels per day,” said Francesco.

Even if OPEC+ doesn’t unwind the cuts, the future ofl prices is still looking break. Citi analysts expect Brent price to average $60 per barrel next year.

Further fueling the bearish outlook is the incoming administration of U.S. President-elect Donald Trump, whose return is associated by some with a potential trade war, said analysts who spoke to CNBC.

“If we do get a trade war — and a lot of economists think that a trade war is possible, and particularly against China — we could see much, much lower prices,” said OPIS’ Kloza.

Trump has also touted a “drill baby drill” policy for U.S. producers, vowing to cut energy prices in half.

For that to happen to retail gasoline prices, oil would need to drop to “below $40” per barrel, said Matt Smith, Kpler’s lead oil analyst.

Right now, retail gasoline prices are at a “sweet spot” at $3 per gallon, where consumers do not feel the pinch and input prices are still sufficiently high for producers, Smith added.

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