The global oil market is bracing for a potential supply glut in the first half of 2025, and possibly beyond, despite OPEC+’s decision to maintain production cuts for an additional three months. This projection stems from a confluence of factors, primarily the anticipated surge in non-OPEC+ production, which is expected to outpace global demand growth. The International Energy Agency (IEA) forecasts a demand growth of around 1.1 million barrels per day (bpd) in 2025, while non-OPEC+ output is projected to increase by 1.5 million bpd, driven largely by North and South American producers including the US, Canada, Guyana, Brazil, and Argentina. This imbalance sets the stage for a surplus market, potentially depressing oil prices and fostering a bearish sentiment in the coming year.
The anticipated increase in US crude production, already exceeding 13 million bpd, plays a significant role in this projected oversupply. While a potential Donald Trump presidency might offer some upside to US production through deregulation and expedited infrastructure approvals, the primary driver remains the inherent dynamism of the US shale industry. American shale producers have strategically employed hedging techniques, locking in future sale prices to mitigate risks associated with OPEC+’s production decisions. This practice allows them to maintain profitability even amidst price fluctuations, ensuring their continued operation and contribution to the global supply.
The US shale industry’s resilience is further bolstered by its financial savvy, evident in the hedging strategies employed by drillers. By guaranteeing future sale prices at acceptable levels, typically on a 12-to-24-month rolling basis, these producers can effectively weather market volatility and secure profitability. This year alone, hedging has seen phased sale price guarantees decline from $85 to $70 per barrel (Brent benchmark), demonstrating an adaptive approach to market dynamics. For shale operators with production costs around $40 per barrel, these hedging mechanisms provide a vital lifeline, ensuring their continued participation in the market regardless of OPEC+’s actions.
Furthermore, the US shale landscape has been strengthened through industry consolidation, with mergers and acquisitions fostering greater commercial resilience. Major energy companies, now significant stakeholders in the shale sector, are also poised to increase production both domestically and internationally. ExxonMobil’s recent announcement of an 18% production increase by 2030 exemplifies this trend, further compounding the challenges faced by OPEC+. This surge in non-OPEC+ production coincides with a softening of demand, particularly from China, which has seen imports decline by 300,000 bpd compared to the previous year. This confluence of factors creates a complex dilemma for OPEC+.
The subdued demand growth, coupled with a potential slowdown in the global economy, exacerbates the challenges for OPEC+. Global oil demand growth, which neared 2 million bpd in 2023, is expected to be halved in 2024 and remain relatively stagnant in 2025. Factors such as potential trade wars and a stronger dollar further complicate the demand outlook. OPEC+’s decision to delay production increases aims to mitigate an immediate price slump, but it inadvertently benefits shale producers while eroding the cartel’s market share.
This delicate balancing act leaves OPEC+ in a precarious position. Increasing production to regain market share risks triggering a significant price drop, a scenario the group has been reluctant to embrace despite holding a substantial spare capacity of 6 million bpd. Conversely, maintaining production cuts allows non-OPEC+ producers, particularly US shale operators, to capitalize on the stable price environment and further expand their market presence. Regardless of OPEC+’s next move, the current outlook suggests a less-than-bullish oil market in the foreseeable future. The interplay between OPEC+’s strategic decisions, the dynamism of the US shale industry, and the evolving global demand landscape will ultimately determine the trajectory of the oil market in 2025 and beyond.
