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Wednesday, February 5, 2025

OPEC Cuts End: $40 Oil by 2025?

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OPEC+ Output Cuts and the Looming Threat of a Crushing Oil Price Crash

Market analysts are voicing serious concerns about a potential dramatic decline in oil prices in 2025, fueled by the possibility that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) could unwind its existing production cuts. This scenario, coupled with other factors like sluggish Chinese demand and increased production from non-OPEC members, paints a bearish picture for the year ahead, with some predicting a price plunge to levels not seen since the COVID-19 pandemic. The potential impact on global economies and energy markets is significant, sparking widespread debate among experts and investors.

Key Takeaways:

  • Potential for a significant oil price drop: Analysts warn of a potential fall to $30-$40 per barrel if OPEC+ fully unwinds its output cuts, representing a roughly 40% decrease from current levels.
  • Slowing Chinese demand: Sluggish economic recovery in China, a major oil importer, is dampening global demand and putting downward pressure on prices.
  • Increased non-OPEC production: The U.S., Canada, Guyana, and Brazil are all increasing their oil production, further contributing to an oversupplied market.
  • Gradual versus abrupt unwinding: While a complete and immediate reversal of OPEC+ cuts is a concerning possibility, analysts believe a more gradual unwinding is more likely early next year.
  • Political uncertainty: The upcoming administration of President-elect Donald Trump and his potential “drill baby drill” policy, coupled with the possibility of a trade war, are adding to the bearish market sentiment.

A Looming Price War?

The fear surrounding 2025 oil prices is palpable. Tom Kloza, global head of energy analysis at OPIS, an oil price reporting agency, stated, “There is more fear about 2025’s oil prices than there has been since years — any year I can remember, since the Arab Spring.” He added that a complete unwinding of OPEC+ cuts could see prices plummet to “$30 or $40 a barrel.” This sentiment is echoed by other analysts. Henning Gloystein, head of energy, climate, and resources at Eurasia Group, told CNBC that a full unwinding of supply cuts would “undoubtedly see a very steep slide in crude prices, possibly toward $40 a barrel.” Saul Kavonic, senior energy analyst at MST Marquee, warns that such a move would “effectively amount to a price war over market share that could send oil to lows not seen since Covid.

The OPEC+ Factor

OPEC+ has been meticulously managing its output, extending voluntary production cuts of 2.2 million barrels per day to stabilize prices. However, these cuts have been repeatedly delayed, as evidenced by the September and October decisions to postpone the planned rollback by two, and then one, months respectively. This careful management is directly responding to the weakening oil market. The alliance’s October decision to further delay the planned output increase suggests a continued cautious approach.

Weakening Demand

A significant factor contributing to this bearish outlook is the weaker-than-expected recovery in oil demand from China. In its monthly report released in October, OPEC lowered its 2025 global oil demand growth forecast from 1.6 million barrels per day to 1.5 million barrels per day. This reduction reflects the ongoing challenges facing the Chinese economy, which could significantly impact global oil consumption.

Oversupply and the Rise of Non-OPEC Producers

The potential for a significant price decline isn’t solely reliant on OPEC’s actions. The market is already experiencing signs of oversupply, particularly with increased production from non-OPEC nations. Gloystein emphasizes that key producers like the U.S., Canada, Guyana, and Brazil are planning to add to global supply. This convergence of increasing supply and slower-than-anticipated demand creates a perfect storm for price depression.

A Bearish Outlook for 2025

The market consensus points toward a substantial oil stock build in 2025. Francesco Martoccia, energy strategist at Citibank, warns, “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.” This surplus would further exacerbate already depressed prices. Citi analysts anticipate that the Brent price will average $60 per barrel next year, a significant reduction from current levels.

Political Headwinds

Adding to the bearish outlook is the impending Trump administration. Analysts highlight the potential for increased domestic oil production under a “drill baby drill” policy, along with the possibility of renewed trade conflicts. Kloza notes, “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.” The prospect of a trade war and a renewed focus on domestic energy production further intensifies the downward pressure on oil prices.

Retail Gasoline Implications

Matt Smith, Kpler’s lead oil analyst, highlights that for retail gasoline prices to fall significantly (to align with Trump’s campaign promises), oil prices would need to drop drastically, “below $40” per barrel. Currently, retail gasoline prices are viewed as being in a favorable position, low enough to not burden consumers significantly while remaining high enough for producers to still be profitable. This balance, however, is extremely fragile, and could be severely disrupted by a significant decrease in the price of oil.

Conclusion

The potential for a sharp decline in oil prices in 2025 is a very real concern. The confluence of factors, such as OPEC+’s production decisions, slowing Chinese demand, increased non-OPEC supply, and political uncertainty, creates a compelling case for a bearish outlook. While a gradual unwinding of OPEC+ cuts is more likely, the potential for a rapid and deep price drop remains a significant risk for global energy markets and economies. The coming months will be crucial in determining the trajectory of oil prices, with the actions of OPEC+, the performance of the global economy and the political landscape all playing a significant role.

Article Reference

Sarah Thompson
Sarah Thompson
Sarah Thompson is a seasoned journalist with over a decade of experience in breaking news and current affairs.

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