On the demand side, China has become a major challenge for OPEC+ this year and perhaps well into the future.

China’s faltering economy and the pace at which it is electrifying its transport sector with electric vehicles and LNG-fuelled trucks has caught the cartel by surprise. China’s oil demand growth, until recently 500,000 to 600,000 barrels a day, has slowed to roughly 200,000 barrels a day.

For the first seven months of this year, China’s oil imports have been about 320,000 barrels a day lower than for the same period last year.

No one expects China’s economy to suddenly boom, given the depth of its economic issues. Most forecasters think it will struggle to achieve its targeted growth of “about 5 per cent” this year and are pencilling in something even lower for 2025.

The rate at which China is electrifying its transport fleet appears, if anything, to be accelerating. That would represent a structural change in its demand for oil and in the global market’s dynamics.

While elsewhere, the rate of growth in EV penetration seems to have slowed, the uptake of EVs is still strong and will add to the longer-term reduction in demand for oil.

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At a gathering of oil executives, traders and investors last week in Singapore, one of the world’s leading commodity traders, Trafigura Group, forecast that the oil price was “probably going to go into the $60s some time relatively soon”. That prediction was proven right almost immediately.

Other industry analysts think the new floor price for oil is around $US70 a barrel, although Bank of America’s analysts think it could average only $US60 a barrel through next year. For the OPEC+ producers, that’s a grim prospect.

They need an oil price of $US90 a barrel or more to balance their budgets. The Saudis, having embarked on an expensive program of radically transforming their economy, are thought to now need something closer to $US100 a barrel.

It’s also not good news for the Russians, with oil revenue providing the bulk of the funding for the militarisation of their economy to support the war in Ukraine.

Russian oil supply has been trending towards the voluntary ceiling it agreed to as part of the broader OPEC+ voluntary cuts. Under pressure from OPEC to meet its commitments, it is producing a touch over 9 million barrels a day, or about 900,000 barrels a day fewer than it was before the cuts to OPEC+ production started.

It appears likely that global supply will still exceed demand next year. China is unlikely to be able to orchestrate a U-turn in the direction of its economy; the US economy is slowing, and Europe’s is stagnating, even as the major economies continue to make, admittedly slow, progress towards a less carbon-intensive future.

There’s also the potential for a Donald Trump victory in November’s US presidential election.

Separate from the turmoil that might create for the global economy if he were able to follow through on his promise to introduce a baseline tariff of 10 to 20 per cent on all imports, with a 60 per cent tariff on imports from China, there’s his pledge to remove regulation from the shale oil sector so that it can “drill, baby, drill”.

China’s faltering economy and the pace at which it is electrifying its transport sector with electric vehicles and LNG-fuelled trucks has caught the cartel by surprise.

He thinks that can halve US gasoline prices within a year, lower the inflation rate and bring down interest rates.

Of course, US oil companies are already producing at record rates, and it isn’t clear that, even with Trump’s proposed deregulation, they could significantly and almost immediately increase production materially.

The gap in the logic of Trump’s plan for the oil sector (gaps in logic being a not uncommon feature of his plans) is that, in the current environment where there is already a building glut of supply, more US oil would force the price down further.

Prices around or below $US60 a barrel would render some shale oil production uneconomic.

America’s shale oil production has shown itself to be very responsive to demand – production is dialled up or down quickly in response to fluctuations in demand and prices. The oil companies aren’t going to drill and produce unless it is economically sensible to do so, and Trump wouldn’t have any authority to force them to ignore the economics.

There’s not a lot that OPEC+ can do about the supply and demand imbalance.

The cartel tried, a decade ago, to drive the fledgling US shale oil producers from the market by significantly increasing their production, but only succeeded in incentivising the US companies to become more innovative, cost-competitive and productive. That significantly undermined the cartel’s control of the market.

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In 2020, with prices collapsing at the onset of the pandemic, Russia refused to agree to a production cut, which ignited a price war that forced the price down close to $US40 a barrel. There was ultimately a stalemate and then an uneasy truce that brought Russia back, largely, into the OPEC+ fold.

That might suggest that the only options available to the cartel – if the Saudis can continue to herd an increasingly fractious collective – are to either cut production further or keep extending the current cuts and sustain the financial pain and opportunity costs either path might impose until the market eventually settles.

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