Two key drivers for oil and bunker market: OPEC+ and geopolitics
1. OPEC+ confirms that oil production increase will be delayed
Last Wednesday, Reuters reported, based on sources close to decision-makers, that OPEC+ plans to postpone the increase in oil production by 180,000 barrels on December 1 by a month or more.
These plans had already been delayed once, as the production increase was initially planned to start on October 1. The sources that Reuters quotes cite weak demand and rising supply.
Then, on Sunday, OPEC+ officially confirmed that the planned production increase had been postponed. OPEC has built a reputation for announcing changes one month ahead. Furthermore, the exact production quotas are essential for countries like Saudi Arabia that announce OSPs (Official Selling Prices) at the beginning of the previous month. The December OSP from Saudi Arabia has not been published on Monday's editorial deadline.
Hence, despite the recent spike in oil prices due to renewed geopolitical concerns, it did not allow OPEC+ to go through with the production increase.
When the Reuters story came out last week, Brent traded around USD 72.00 and rose to USD 72.50 in the aftermath. If OPEC+ had tried to test the market to see the market reaction, they would probably have been slightly disappointed by the modest market reaction. If the sources had said the production increase would go through, we would not have been surprised to see Brent testing the USD 70 level. On Monday, the day after the announcement, Brent rose another US dollar. However, given the geopolitical concerns over the weekend, it was a relatively modest market reaction.
Overall, we see little room for OPEC+ to increase production in December or next year. The confirmation that the production increase would be further delayed reinforced the view that OPEC+ continues to pursue a price rather than a volume strategy. We anticipate the Brent price moving towards USD 80 throughout 2025. Our view is based on the notion that OPEC+ will add very little extra oil to the market in 2025 and that the global economy will develop better than feared, fuelled by lower interest rates.
2. Geopolitics back on the agenda as Iran might attack Israel from Iraq
Last week, geopolitics returned to the top of the oil agenda. The media outlet Axios reported, based on Israeli intelligence sources, that Iran is preparing a major retaliatory strike from Iraq on Israel. According to Axios, Israeli intelligence suggests the attack is expected to be carried out using a large number of drones and ballistic missiles.
The Iranian Revolutionary General Hossein Salami said Thursday that Israel made a mistake when it attacked Iran and stressed that Iran's response would be "different from any scenario" Israel might expect. According to FT, he warned that Iran's retaliation would be "unimaginable".
CNN also reported last week that, according to a high-ranking Iranian source, the recent attack on Israel would be met with a "definitive and painful" response.
Hence, it seems that the rhetoric from Iran has changed and been stepped up over the last week, making the Axios story more credible.
The market is expected to price a higher geopolitical risk premium in the coming weeks. Hence, we should expect a nervous market after the election. If an attack occurs, it would represent a significant escalation, and Israel would likely retaliate.
Israeli military chief Lieutenant General Herzi Halevi warned, according to FT last week, that Israel would "strike very hard" if Tehran retaliated. "If Iran makes the mistake of launching another missile barrage at Israel, we will once again know how to reach Iran, with capabilities that we did not even use this time, and strike very, very hard," he said.
Notably, The Wall Street Journal published two interesting articles over the weekend. One referred to a speech by Iran's Supreme Leader stating that Iran would respond harshly to both Israel and the US. However, the other article was more intriguing, as it, based on sources, reported that Iran is carefully considering the consequences of retaliating, given that its air defence was heavily damaged during Israel's latest attack. Should Iran retaliate, a counterattack from Israel could severely impact Iran. This time, we would expect attacks on oil and nuclear installations.
There is also speculation that Israel may strike Iran even without an Iranian attack again after the election, especially if Trump wins.
