The largest oil-producing region and the most pivotal refinery hub in the US weathered the assault of Hurricane Francine relatively unscathed. The fact that the storm weakened shortly after landfall undeniably mitigated damage. The US Bureau of Safety and Environmental Enforcement estimated that about 40% of the US Gulf Coast oil production came offline at one point. Draws are anticipated in next week’s weekly EIA stats together with depleting product inventories as refiners were also forced to halt operation. Texan ports are re-opened, refiners are gradually ramping up runs and oil output should also normalize swiftly.

Concerns about the unpredictable impact of the tempest most certainly helped oil advance for the second consecutive day. Further support came from the dollar, which found itself under pressure as the ECB cut interest rates for the second time this year. After Wednesday’s US inflation data, the latest jobless claim release did not shake investors’ confidence either, as initial claims matched expectations. Yet, fears of recession and economic headwinds simmer just under the surface and bets on a 0.5% rate cut from the Fed were scaled down lately although have increased significantly to 43% overnight, the CME FedWatch Tool shows. The dilemma is whether recession is a clear and present danger, or a soft landing is a realistic proposition. The recent performance of equity markets indicates that it is the latter and it should help oil defend its newly established floor in case of a pullback as confidence is slowly being re-built.

Gaps Remain

Given the uncertainties lingering over the oil market and the consequential deviations in predicting future oil balance, it is only prudent and useful to compare the views of OPEC and IEA on the contentious point of the demand side of the oil equation, namely Chinese prospects.
The former finds that ‘China’s export and manufacturing sectors remain resilient, despite ongoing property market challenges’. The IEA believes that ‘the rapid decline in global oil demand growth in recent months, led by China, has fuelled a sharp sell-off in oil markets’ and ‘the recent slowdown in China has seen oil consumption declining y-o-y for a fourth consecutive month in July’.

This divergence is laid bare in numbers, not just in narrative. OPEC remains comparatively buoyant on the outlook, but the IEA is tenaciously pessimistic. There is a difference of 1.25 mbpd in this year’s global oil demand assumptions, which widens to 2.10 mbpd in 2025. This year’s growth is 2.03 mbpd (OPEC) versus 880,000 bpd (IEA). The figures are a tad more aligned for next year as they stand at 1.77 mbpd against 920,000 bpd. The common features are that both have been cutting absolute demand figures as well as growth estimates in the last 3 months. On the other hand, it is worth noting that consumption is forecast to reach a record high this year only to be trumped come 2025.

OPEC believes that non-DoC supply growth will be consistently under the expansion in consumption for the next two years – 1.28 mbpd and 1.10 mbpd respectively. The IEA’s perspective is starkly contrasting. Non-DoC supply growth will remain stubbornly over that of demand at 1.50 mbpd for both 2024 and 2025. This will result in wide swings in demand estimates for OPEC+ oil with OPEC being considerably more bullish than the IEA. The producer group expects the call on its oil to reach 43.60 mbpd in 2H this year, 42.83 mbpd in 2024 and 43.45 mbpd in 2025. The energy watchdog of developed nations sees the same figures at 41.80 mbpd/41.55 mbpd/40.93 mbpd.
When these bifurcating projections are extrapolated to OECD stocks, which bear a strong relationship with oil prices, the opposing trajectories become ever so evident. Using the same OPEC+ production estimates going forward (41.55 mbpd for 2H 2024 and 42 mbpd for 2025) one will find a chasm of 154 million bbls in end-2024 commercial OECD inventories, which will open up to 523 million bbls a year later. These differences unmistakably demonstrate the unpredictable nature of oil forecasting and the familiar ‘unknowns’, such as the impact of wars, trade and actual, and climate change.

What is fascinating to observe is that past data is almost perfectly synched and by that we mean industrial stocks in OECD countries, the most salient element in the formation of oil prices. At the end of 2023, they ranged from 2.776 billion bbls to 2.778 million bbls when including the EIA figures in the calculation. The second quarter of this year saw a difference of an acceptable 21 million bbls with the lowest being 2.827 billion bbls and the highest 2.848 billion bbls. The first time all three agencies published 2024 estimates, back in July 2023, the numbers showed a gap of 259 million bbls in 2H 2024 OECD stockpiles with figures stretching from 2.495 billion bbls to 2.754 billion bbls. It insinuates that collecting historical data is a relatively simple task compared to foreseeing future ones. It also reveals that a tiny change in assumptions will result in a considerable change in conclusion.
OPEC sees a tight oil balance for this year and next, and the EIA is firm in its belief that Brent will break back above $80/bbl this month. Conversely, the IEA is adamant that ample non-OPEC+ supply will result in a hefty surplus of the black stuff, notwithstanding OPEC’s efforts to keep output constraints in place. The agency will plausibly stick with this rather downbeat prognosis unless they see palpable improvements in refining margins, something that was not perceptible in the latest update as crack spreads kept declining last month in the major refining hubs across the world. Summing up the differing views, the IEA could not resist wrapping up its Market Overview by contemplating that ‘in the context of a rapidly evolving market, reliable energy data and unbiased market analysis will become more important than ever.’ Yet another war, the war of words continues.
 

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