Growing global demand and supply cuts point to a potential reversal in oil markets
Global oil demand is projected to reach 102 million barrels per day (bpd) in 2023, signalling a substantial growth of 2.2 million bpd this year, according to the latest Oil Market Report from the International Energy Agency (IEA).
The IEA attributes this demand surge primarily to China, the world’s leading oil importer, which recently reached a demand level of 16 million bpd. China is expected to account for nearly 60 per cent of global demand growth in 2023, counterbalancing sluggish demand in developed countries.
On the other hand, while the Organization of the Petroleum Exporting Countries (OPEC) has left its global oil demand growth forecast unchanged in its latest Monthly Oil Market Report, it has revised its expectations for Chinese crude demand upward. With China being a crucial driver of global oil demand, OPEC now anticipates an increase of 800,000 bpd, up from its previous forecast of 760,000 bpd.
Meanwhile, gasoline and diesel inventories in the United States are depleting and are currently below the five-year average for this time of year. This indicates resilient fuel demand, providing support to both crude oil prices and U.S. refining margins. Furthermore, the U.S. Department of Energy is prepared to purchase three million barrels of crude oil for its Strategic Petroleum Reserve, with delivery scheduled for August, earlier than previously anticipated.
Despite the prevailing bearish sentiment in the market, energy experts are starting to adopt a more optimistic outlook. Amrita Sen, chief oil analyst at Energy Aspects, suggests that oil prices could surpass US$100 per barrel by late summer and potentially rally to over US$115 in 2024. During a recent virtual presentation hosted by Wells Fargo, Sen conveyed an “extremely bullish view for oil,” emphasizing that global oil demand would increase by 1.5 million barrels of oil equivalent per day in 2023, driven by China’s economic recovery.
Energy Aspects also predicts that a complete economic rebound in China could contribute an additional 500,000 to 600,000 barrels of oil equivalent per day to global demand. Currently, international travel from China remains 40 per cent below pre-COVID levels, and weaknesses in the property market limit fuel demand from construction activities. However, if these factors return to pre-pandemic levels, Chinese crude consumption could substantially rise.
According to commodity analysts at Standard Chartered (StanChart), the ongoing production cuts by OPEC+ are expected to gradually eliminate the surplus that has accumulated in global oil markets over the past few months. This surplus, which began building in late 2022 and spilled over into the first quarter of this year, has resulted in current oil inventories being 200 million barrels higher than at the start of 2022 and 268 million barrels higher than the June 2022 minimum. However, analysts are optimistic that the surplus could vanish by November if the cuts are maintained throughout the year. In a slightly less bullish scenario, the same result could be achieved by the end of the year if the cuts are reversed around October. These developments should help stabilize prices.
Wall Street investment bank Goldman Sachs also predicts an impending supply crunch, which could contribute to a market turnaround. Jeff Currie, Goldman’s global head of commodities research, suggests that oil prices could exceed US$100 per barrel this year, raising concerns about spare production capacity potentially running out by 2024. Supporting this view, Goldman Sachs recently advised investors to consider energy and mining stocks, citing their potential to benefit from China’s economic growth. The bank’s commodities strategist forecasts a 23 per cent climb for Brent and WTI crude oil, with prices trading near US$100 and US$95 per barrel over the next 12 trading months, an outlook that supports their upside view for profits in the energy sector.
Some output cuts, seemingly in the pipeline, also contribute to this expected tightening of the oil markets. Russia’s crude oil production should fall by 350,00 barrels per day in May from February 2023 levels, reaching 10.709 million bpd, Oilprice.com reported, quoting Kpler analysts, indicating that the country could be making good on its promise to cut its output by 500,000 bpd.
In other words, the current sluggishness in the crude market could only be a phase in passing.
By Rashid Husain Syed
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.