Source: Jin10 Data

Deutsche Bank said that the decision by OPEC+ to gradually increase oil production will cast a "bearish shadow" over oil prices for the next two years, causing unprecedented uncertainty since the severe demand destruction during the pandemic.

Eight OPEC+ members, led by Saudi Arabia and Russia, agreed last Sunday to gradually phase out voluntary production cuts of 2.2 million barrels per day from October 2024 to September 2025.

In response, Deutsche Bank analyst Michael Hsueh told clients in a report on Wednesday that it is "difficult to imagine the market absorbing" nearly 2.2 million barrels per day of crude oil. Hsueh wrote that the potential increase in supply is similar to the 2.3 million barrels per day oversupply in the first year of the pandemic in 2020.

Goldman Sachs also described the latest production policy by OPEC+ as a "bearish shock," while TD Securities warned that "situations may quickly deteriorate" in 2025.

Deutsche Bank said that if OPEC+ fully implements its current production policy, Brent crude oil prices will fall below $60 per barrel in the second half of 2025.

Hsueh wrote that the uncertainty caused by this decision "has never occurred since the disruption of global oil demand by COVID-19 and the breakdown of supply negotiations between Saudi Arabia, Russia, Mexico and the United States."

However, since the market has a limited appetite to digest so much oil, Deutsche Bank expects the eventual increase in oil supply to be close to 1 million barrels per day, and OPEC+ will suspend the plan in a few months. The bank said this could lead to a slight oversupply of 600,000 barrels per day in 2025.

In this scenario, Deutsche Bank lowered its oil price forecast for 2025 by 10%, and expects the increase in supply to push US crude oil prices down to $70 per barrel and Brent crude oil prices down to $75 per barrel by the end of next year.

Hsueh said that the policy shift by OPEC+ "marks the end of the supply tightening cycle that began in October 2022." In the past two years, OPEC+ has boosted prices through multiple rounds of production cuts, equivalent to about 6% of global demand, in an effort to boost prices amid high interest rates that dampened demand.

Hsueh also noted that the increase in supply by OPEC+ sends a "warning" to oil-producing countries outside the alliance, especially the United States, whose market share has been growing due to OPEC+'s ongoing restrictions on crude oil supply.

As OPEC+ may regain some market share, Deutsche Bank lowered its supply growth forecast for the United States by 100,000 barrels per day this year and 300,000 barrels per day by 2025.

However, analysts said that given that the increase in supply will not start until the fourth quarter, this week's sell-off in the oil market has been excessive. Deutsche Bank said that before OPEC+ begins to increase production, the supply gap of 500,000 barrels per day this quarter will rise to 1 million barrels per day in the third quarter. As a result, Brent crude oil prices will rebound to over $80 per barrel in the short term, and reach $85 per barrel in the next quarter, laying the foundation for tactical long trading.

Editor/Lambor