RBC Capital Markets Warns of Uncertainty in Crude Oil Markets

RBC Capital Markets, in a recent report, has highlighted that crude oil markets are likely to face approximately two months of uncertainty. This is primarily due to the fact that OPEC and its allies will not report compliance levels with the recent voluntary production cuts until late January.

According to RBC analysts, even considering the addition of new supply from non-OPEC countries in 2024, they firmly believe that demand will surpass supply throughout the entire year. The bank emphasized that their estimated 2024 supply and demand balances assume full compliance with the new OPEC quotas. They have projected a stock draw of 300,000 b/d in the first quarter, 500,000 b/d in Q2, 900,000 b/d in Q3, and 1.4 million b/d in the final quarter of the year.

It's important to note that the implementation of the agreed-upon cuts from last week's OPEC meeting will not occur until January. This means that reliable reports on compliance will only be available around 60 days from now. Consequently, this increase in uncertainty will add complexity to a market that is already grappling with ambiguity.

RBC's outlook for the 2024 oil market is reminiscent of the period between 2010 and 2019, when U.S. shale oil production was on the rise. The bank predicts that U.S. crude production will see a rise of 400,000 b/d next year. Furthermore, it anticipates combined output from the U.S., Brazil, Guyana, and Canada to increase by 1.9 million b/d by the end of next year.

While RBC acknowledges the likelihood of supply deficits in the market next year, it remains in a "show me" stance, waiting for a clear catalyst for direction. Until statistics on cartel compliance are published, oil futures may be inclined to follow the path of least resistance and move lower in the near term.

The report also highlighted two surprises this year. Firstly, there was an unexpected increase in U.S. oil production, reaching approximately 1 million b/d. Secondly, China's economy failed to meet expectations after the lifting of Covid-19 restrictions.

Reporting by Tom Kloza, Editing by Jeff Barber