Paradoxically, the recent, seemingly encouraging, performance of the oil market has shown just how worrying prospects are going forward. Prices are still around $7/bbl higher than at the beginning of October, but the weakness of the last two days demonstrated that in the absence of an actual supply disruption, nothing could provide prolonged price support. Focus shifted back to macroeconomics and oil balance. As so eloquently laid out in yesterday’s report, China is being cold-shouldered by investors and unless consumer spending and demand are re-invigorated no amount of apparent stimulus will change the sentiment. The return of Libyan barrels is also causing concerns, and the global oil balance is set to loosen as discussed below.

Those with bullish propensity will doubtlessly seize the day whenever there is a window of opportunity to do so. The weekly US oil statistics yesterday was one of these occasions and helped the market recover from the early sell-off. Crude oil stocks built less than reported by the API and commercial oil stockpiles declined by more than 8 million bbls as gasoline inventories plunged 6.3 million bbls. Refiners supplied 21.2 mbpd of products, 9.7 mbpd of which was gasoline hinting at healthy US demand, partly due to hurricane-related buying. US financial data, such as today’s CPI, jobless claims and interest rate expectations could lead to sporadic price jumps. None of these foretells a protracted bull market, however. Without a genuine demand excess or supply shortage, the risk will remain skewed to the downside and even if the Israeli bellicose rhetoric is embodied in an Israeli assault on Iranian oil infrastructure the price reaction could be brief, albeit violent.

Increasingly Bleak 2025 Outlook

There is no consensus on how the supply/demand oil balance will be shaped in the immediate and medium-term. There are wide gaps in demand projections. The pace of the transition from fossil fuel to renewable energy is a guestimate, at best. It is nigh impossible to foretell how OPEC and its allies will behave in the future. The cohesion within the group is a great ‘unknown’. When one puts these unquantifiable variables into the magic formula, the result will be ambiguous. There are, nonetheless, two factors that one can rely on with a relatively healthy dose of confidence. Output from countries outside the OPEC+ organization will expand at a very respectable rate (of course, depending on the price level), and global demand projections that have been overwhelmingly upbeat in the recent past, are being corrected. Tuesday’s updated Short-Term Energy Outlook from the EIA provides solid evidence of the uphill battle forecasters face.

The keywords are amendment and revision. Since Russia invaded Ukraine, predicting economic and oil demand growth, as the fierce battle against inflation got underway, has proven a mountainous challenge. The consequential impact of unstable economic and demand prospects is equivocal supply estimates, particularly from the OPEC+ group. Season this backdrop with geopolitical/ geoeconomic concerns, and unprecedently deviating stock markets from China to Europe over to the US as globalization fades into the background in the name of national security, and the obstacles in reliably predicting the oil balance become perceptible.
The EIA stuck to the current narrative in almost every aspect of the report. The change starts with oil prices. Brent has undergone a $7/bbl downgrade month-on-month, and the EIA now expects the European benchmark to average $78/bbl in 2025 due to lower demand growth – 30,000 bpd and 220,000 bpd lower for this year and next, to be precise. The current curve is around $75/bbl. Intriguingly, the revised 2025 estimate is higher than the price of $74/bbl recorded in September, and the first half of next year will see an even more elevated price level of $79/bbl, chiefly due to self-restraints from OPEC+.

The current quarter experiences a combined 420,000 bpd swing in the call for DoC oil, from 43.30 mbpd to 42.98 mbpd. Oil demand has been cut by 80,000 bpd from September and non-DoC supply improved by 340,000 bpd. Yet, given that the alliance is set to produce 42.37 mbpd in 4Q, global oil inventories will deplete by 610,000 bpd; seemingly encouraging but less than half the figure seen last month. It entails OECD stocks thinning from 2.811 billion bbls in 3Q to 2.770 billion bbls by the end of 2024.

Next year is more aligned as demand was cut by 250,000 bpd, and non-OPEC+ supply by 210,000 bpd. Demand for DoC oil has been lowered every quarter bar the last one next year giving an average downward revision of 40,000 bpd. It is now seen at 43.14 mbpd and given that DoC output was upgraded by 150,000 bpd to 43.33 mbpd, global oil inventories will build by 190,000 bpd throughout 2025 – a considerable depletion of 570,000 bpd in 1Q will be followed by handsome builds of 200,000 bpd, 520,000 bpd and 610,000 bpd in the ensuing quarters. It insinuates that stockpiles will be higher at the end of 2025 than 12 months earlier. 

The three key takeaways from the latest EIA forecast are as follows: firstly, estimating the OPEC+ output level with a high degree of certainty is an arduous task, but one can safely conclude that deeper cuts are implausible. Secondly, OECD commercial stocks will be lower in 1H 2025 than in the corresponding period of 2024 but will finish the year higher. Price upside potential is limited, and the Brent price for next year should be under the 2024 average, which is $81.64 to date. Thirdly, in 2024 and 2025 global demand growth underwhelms the increase in non-DoC supply precipitating a declining call for DoC oil. It is another factor that may cap any attempt to push prices meaningfully higher. It is reasonable to anticipate the perpetual differences to persist in the prognosis of OPEC and the IEA when they release their findings on Monday and Tuesday. Yet, the changes in demand projections ought to be consistent and confirm what the EIA foresees: a softer oil balance.
 

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