It is axiomatic that if China is infected with an economic virus, the whole would feel the repercussions. Yesterday was the exception that proved the rule. Industrial output, the backbone of the world’s second biggest economy, expanded less in May than in April and came in under forecast. The economy is far from obtaining a clean bill of health, yet anxiety about its performance was swept under the carpet. Or the generally bleak backdrop has been accounted for and focus turned to the global oil balance, which is set to tighten in the second half of the year – if last week’s reports are to be believed. The decisive jump in both WTI and Brent backwardation implies an increase in refinery thirst, the immediate proof of which will be this week’s EIA stats, which is expected to show a drawdown of 2.3 million bbls in crude oil inventories, the latest Reuters survey indicates, and which will be released a day later than usual due to tomorrow’s bank holiday in the US.

The weakness in the euro precipitated by the EU parliamentary election and by the advance of the French right-wing party ended abruptly, the dollar fell providing additional support for oil. Judging by the confident performance of the US equities markets and last Thursday’s rise in initial jobless claims, a Fed rate cut in September must not be ruled out, a boon for anyone with bullish propensity. It looks as though the stars are getting re-aligned for continuous strength, nonetheless, the critical data set this week, at least for us, will be the US oil inventory data as it could confirm or refute the developing optimism that demand has started its ascent at the dawn of the summer driving season.  

Whom to Believe

The irreconcilable differences that are found in the forecasts of OPEC and the IEA on future oil supply and demand are scrutinized every time updated estimates emerge. The convenient explanation for this chasm is that one group represents oil producers therefore it is its unalienated interest to promote the use of fossil fuel, but the other, the energy watchdog of the largest consuming nations in the world, have been and will always be the stern advocate of the swift switch to renewable energy. Undeniably, there is an element of the ‘end justifies the means’ in forward guidance of oil balances, nonetheless it is also beyond doubt that since a completely new energy landscape is surfacing in front of our eyes every prediction or prognosis is, to a certain extent, a shot into the dark, into the unknown. There are as many pros as cons in forming a bullish or a bearish view, the arsenal of both sides is seemingly inexhaustible. The gap in next year’s global balance was extensively discussed in last Thursday’s note. In its latest medium-term outlook released the same day as its monthly update, the IEA also stuck to its gun and predicted an inauspicious future for those involved in oil production.

The IEA labels the landscape the oil market needs to navigate challenging, and it would be brave to disagree. It sees accelerating deployment of clean energy and energy-saving technologies resulting in adverse growth in oil demand. At the same time global oil supply is rising, mainly due to the relentless increase in non-OPEC countries. Consequently, total supply capacity will rise to 113.8 mbpd by 2030, compared to demand of 105.4 mbpd creating a historic cushion of 8.4 mbpd – ‘dangerous commentary’, OPEC reacted. Below we take a look at the two salient segments of the oil market, demand and supply, and will wrap it up by drawing a balance.

Demand: average growth rate between 2023 and 2030 will be 0.4% with the actual growth seen at 3.2 mbpd, from 102.2 mbpd last year to 105.4 mbpd in 6 years’ time. Consumption will rise every year up to 2029 when it will reach 105.6 mbpd and then contract by 200,0000 bpd. It is intriguing to note that in last year’s edition, which covers the period throughout 2028, the IEA predicted demand to stand at 105.7 mbpd, a year later 200,000 bpd less – demand outlook has deteriorated in the past year.

Every part of the OECD world will need less oil by 2030 than last year led by the Americas where contraction will be around 1.6 mbpd, in Europe 1.2 mbpd and in OECD Asia/Oceania 200,000 bpd. Conversely, China’s and India’s thirst for oil will increase by 1.4 mbpd and 1.3 mbpd respectively and oil consumption will also be up in ‘other Asia’, Africa and ‘other Americas’.

The composition of demand for different refined products makes interesting reading. Between 2023 and 2030 road fuel demand will take a considerable hit. In fact, the IEA reckons that it is plateauing this year. As EV sales continue their upward trajectory 6 mbpd of gasoline and diesel demand will be replaced by 2030, whilst displacement in the usage of oil in power generation will also contribute to the fall in crude, fuel oil and gasoil need. The resilience and growth in the petrochemical sector will ensure unabating gains in the consumption of naphtha and LPG/Ethane.

Supply: global supply capacity will jump by 6 mbpd to 113.8 mbpd by 2030, 45% of which will come from NGLs and condensate as demand shifts to petrochemicals. Global oil supply to the market (not the supply capacity described above) will increase from 102.2 mbpd in 2023 to 106.4 mbpd 7 years later. Non-OPEC+ producers, particularly in the Americas, will be responsible for an increase of 4.4 mbpd. OPEC+ crude oil output, which includes condensates and NGLs, and is based on the current output policy will decline by 370,000 bpd by 2030 but will remain above the call. OPEC+ production capacity will increase 1.4 mbpd on average between 2023 and 2030 with Middle East producers being the heartbeat of this growth. The OPEC+ market share of global supply, which fell below 50% last year will bottom out in 2029 and edge towards 48% by the end of the period.

In the medium-term outlook the IEA does not provide data for non-OPEC+ production but publishes non-OPEC figures. It is therefore only possible to calculate the demand for OPEC oil. It shows gradual decline from 27.5 mbpd last year to 25.6 mbpd in 2029 after which it is forecast to advance to 25.9 mbpd. The plummeting need for OEPC oil and the perceived more than comfortable supply cushion will sow the seeds of a lower oil price environment, the IEA foresees. Of course, this conclusion leads to the multi-million-dollar question. Would this low oil price environment, which is the product of healthy supply and diminishing demand growth, not result in slower transition as oil would remain more competitive compared to renewables and therefore ultimately prove the latest IEA outlook dubious, at best?
 

Overnight Pricing

© 2024 PVM Oil Associates Ltd