Oil prices could fall significantly in 2025 as the market enters a significant surplus, Citi has warned. The main reasons are a drop in demand caused by the increasing adoption of electric vehicles and greater energy efficiency, while non-OPEC production will grow.

Citi forecasts

Under Citi's base case scenario, the price of global benchmark Brent starts to decline in the fourth quarter of 2024 and settles at $60 per barrel in 2025. World oil inventories are projected to grow by 1.4 million barrels per day (bpd) next year.

OPEC+ members recently announced plans to increase production by 2.5 million barrels per day from October to September 2025. Even if OPEC+ called off its plan entirely, there would still be a surplus of 900,000 bpd on the market, Citi analysts said.

Non-OPEC production

Non-OPEC oil production is expected to increase by 1.8 million barrels per day in 2025, mainly due to increased production in North America, Brazil and Guyana. This production growth will exceed expected slowing demand growth by 900,000 barrels per day.

"The slowdown in demand growth reflects increasing energy efficiency and the growing displacement of oil by electric vehicles," Citi analysts said. "Without supply disruptions, OPEC+ seems unlikely to return oil to the market without accepting lower price spreads."

Possible scenarios

Under Citi's baseline scenario, OPEC+ delays the return of barrels to the market until mid-2025. However, if the group sticks to its plan, the oil market will see a surplus of 2.6 million barrels a day or more. In that case, Brent crude prices could fall below $50 a barrel.

Deutsche Bank also warned of a drop in oil prices if OPEC+ increases production as planned. Analyst Michael Hsueh said that the market will not be able to absorb that amount of oil. Deutsche Bank predicts that Brent crude prices could fall below $60 a barrel if OPEC+ implements the plan. In the event of a more modest increase in production, the bank expects a price of around $75 a barrel by the end of 2025.

TD Securities also warned that fundamentals could deteriorate rapidly in 2025 if OPEC+ increases production.

International Energy Agency warning

The International Energy Agency (IEA) warned on Wednesday that the world will be awash with oil by 2030, with production capacity exceeding demand estimates by eight million barrels a day. This could lead to spare capacity similar to that during the height of the Covid-19 pandemic, with serious implications for OPEC economies and the US shale industry.

"As the pandemic recovery loses momentum, the transition to clean energy progresses and the structure of the Chinese economy changes, global oil demand growth slows and peaks by 2030," said IEA Executive Director Fatih Birol.

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Source: Yahoo Finance, CNBC, Bloomberg