For the first time in history, attacks against Israel were launched from within Iran after the bombing of the Iranian consulate in Damascus at the beginning of the month. Israeli retaliation of this retaliation seems inevitable, the severity and the timing of it is unclear. How many more of this “r word” will have to be added to the previous sentence is a frightening prospect. Yet, what was observed yesterday is a calm market reaction to the unprecedented escalation of tension around the most salient oil producing region in the world. Instead of rallying the two major crude oil contracts were more than $1/bbl down at one point before recovering and settling somewhat below Friday’s closing prices. The late strength spills over into this morning because China’s 1Q GDP growth of 5.3% beats forecast although sluggish retail sales and frail industrial output still imply depressed domestic demand.

Back to the Middle East, there are several reasons for the lack of panic. Firstly, the Iranian assault is considered a calibrated move, it was widely anticipated and telegraphed. It is no coincidence that almost all 300 rockets, missiles and drones were neutralized. Secondly, the current thinking is that the Israeli response will be measured, not least because of international and US pressure to show restraints. Iran is unlikely to exacerbate the situation unless provoked as it is keen to ensure undisrupted crude oil exports. Thirdly, the more than 5 mbpd OPEC spare capacity could act as a safety valve should the situation deteriorate.

The market is pragmatic, and focus shifted back towards inflation. An unexpectedly great stride in March US retail sales mirrors a very resilient economy, which might not justify imminent rate cuts. US stocks were sold off, bond yields came under pressure and gold settled at a record high. Continuously high borrowing costs will act as a break on economic and oil demand growth. The balancing act between sticky inflation, a hesitant Fed and the gradual move towards a full-blown regional conflict keeps oil prices in its range. Material disruption to oil production, supply or shipping must take place to approach the $100/bbl milestone. Currently such a development appears implausible but the imaginary barrels in the region are filled not with oil, but gunpowder and one spark could send the whole region up in flames, something that neither of the warring parties advocates.

Diverging Views, Very Diverging

Last in the row, the IEA last week published its findings on next year’s oil balance for the first time, three months earlier than in the past, eager not to be left behind the EIA and OPEC. It is, therefore, a timely exercise to compare the views on 2025 paying particular attention to demand developments in China and the anticipated supply from the non-OPEC part of the world.

To say that there is no consensus on how oil consumption and production/supply will shape our market going into 2025 is a massive understatement and forming an opinion based on the latest set of data is the very definition of rigmarole. What is common between the 2024 and the 2025 forecasts is that OPEC is perceptibly more upbeat in oil consumption than the other two agencies and it sees the supply from non-OPEC oil producers lagging the growth in global oil demand. As a result, the reliance on OPEC’s own oil will increase further next year, something that goes against the updated numbers from the EIA and the IEA.

To begin with worldwide consumption, OPEC is, by far, the most optimistic, in absolute terms as well as concerning annual growth. It would expect global oil demand to average 106.33 mbpd next year, more than 2 mbpd above the other two estimates and a whopping 15.05 mbpd or 16% recovery from the pandemic-induced devastation in 2020. For the last quarter of 2025 the world will need 107.33 bpd of black gold. Next year will see oil demand rise by 1.87 mbpd, OPEC reckons, compared to 1.35 mbpd (EIA) and 1.13 mbpd (IEA). The developing part of the world will be responsible for almost the entire growth – there is an agreement on that front. Ominously, however, China seems to be losing relevance as the heartbeat of oil demand growth. Its appetite for oil will grow 410,000 bpd next year, which is 22% of the total, OPEC estimates. It compares with 30% in 2024 and 50% in 2023.

OPEC is the most buoyant on demand and demand growth, but it is the most pessimistic on supply outside of the organization. Their forecast of 71.75 mbpd of non-OPEC supply is the lowest of the estimates and so is the annual growth rate of 1.30 mbpd. The EIA puts it at 1.60 mbpd with the IEA standing at 1.45 mbpd. The lion’s share of the increase (700,000 bpd) will come from the OECD and within that from the US (500,000 bpd) whilst in the non-OECD part of the world 270,000 bpd will originate from Latin America (chiefly Brazil and possibly Guyana) whilst OPEC also believes that Russian supply will register an annual growth of 130,000 bpd.

The upshot of the latest predictions for next year is that whilst the EIA and the IEA believe that the increase in non-OPEC supply will be more than sufficient to cover the growth in global oil demand OPEC takes a contrary view. To approach the issue from a slightly different angle the call on OPEC will decline by 200,000 bpd to 26.95 mbpd, the EIA concludes and by 430,000 bpd to 26.83 mbpd, the IEA projects. OPEC, on the other hand, sees demand for its oil ascend by 500,000 bpd in 2025 to 29 mbpd. Arbitrarily assuming an OPEC output of 27 mbpd, the former two contemplate increases in global and OECD inventories throughout 2025 but OPEC advocates massive drawdowns.

The forecasted changes in OECD stocks are where the deviation is most conspicuous with immense price impact. The EIA and the IEA are in broad agreement that OECD inventories ought to finish next year around 2.73 billion bbls, but OPEC figures suggest that they would fall as low as 2.2 billion bbls, amplifying the contrast from 2024. The chasm is probably the widest ever entailing a price difference of close to $35/bbl by end-2025 (the range is $88/bbl and 122/bbl) using the reliably high inverse correlation between oil prices and OECD stockpiles. These out-of-sync perspectives do not paint a harmonious picture although it is only fair to surmise that given the precarious inflationary backdrop, which would hurt the demand side of the oil equation and consequently producing nations and the reassuringly comfortable spare production capacity OPEC might be inclined to open the spigots should prices remain at elevated levels come 2025.

Overnight Pricing

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