Oil prices are experiencing tension, with current rates near $70 a barrel, while forecasts predict a market weakening. The International Energy Agency (IEA) and the US Energy Information Administration anticipate an oil surplus next year, with the IEA foreseeing a daily excess of 2 million barrels.
Francisco Blanch, from Bank of America Corp, indicates that this surplus, especially in the year’s latter half, will put pressure on prices. TotalEnergies SE has also noted that the market faces ample supply as the OPEC+ alliance eases production limits despite a slowdown in global growth affecting demand.
Additional Oil Supply Developments
Elsewhere, Norway’s Equinor ASA has its Johan Castberg field at full throttle, and Brazil is set to activate its offshore assets. These developments suggest additional oil supply from outside the OPEC framework.
We are observing a market with firm immediate prices but clear warnings of future oversupply. This discrepancy between the present and the future creates specific opportunities for derivative plays. We believe the key is to position for a potential price decline in the coming months, rather than reacting to today’s spot price.
The forecasts from the International Energy Agency are a major signal, and we take them seriously. This view is echoed by the US Energy Information Administration, which in its June 2024 outlook also projected that global oil inventories will increase through 2025. This buildup of supply suggests that longer-dated futures contracts are likely overvalued relative to the spot market.
Potential Trading Strategies
Blanch’s point about a second-half surplus weighing on prices suggests a classic trading strategy. We are looking at selling longer-dated contracts, such as those for the fourth quarter of 2024 or the first quarter of 2025. Historically, when such supply gluts materialize, the back end of the futures curve tends to fall faster than the front, rewarding bearish calendar spreads.
The warning from the French energy giant, combined with the recent OPEC+ decision to begin unwinding production cuts in October, points to a clear catalyst for lower prices. To capitalize on this while managing risk, we are considering purchasing put options with strike prices below $65 for December 2024 expiration. These instruments provide downside exposure with a defined and limited initial cost.
The additional barrels from outside the traditional cartel are a critical factor we cannot ignore. For instance, the new Norwegian field is adding over 100,000 barrels per day, while Brazil’s output continues to climb, with recent government data showing production consistently above 3.4 million barrels per day. This steady stream of non-OPEC supply provides a structural headwind against any significant price rallies.
