One way to look at our market is that it is erratic, sometimes vicious and in the absence of any salient development that might help investors commit themselves to either direction for the long run it is driven by headlines. A different approach is to say that it is comfortably paddling in its newly established range, that is the true reflection of the current underlying fundamentals and headlines move prices within this band. It is basically made up by the lows and highs of last month.

Inflation and interest rate expectations and related movements in the dollar are certainly one of the driving forces and yesterday started on the backfoot with a stable greenback (which weakened later on the day) ahead of today’s US CPI data. Middle East tension and the intensifying Houthi attack on commercial vessels can trigger a sudden change of heart any time, especially if it is coupled with a cold spell on the US East Coast and a Libyan force majeure that supports Brent derivatives as demonstrated by the rally in the middle of yesterday’s trading session.

The mood then soured again after the release of the weekly EIA stats on US oil inventories. The major categories all registered builds with commercial stocks rising by nearly 10 million bbls. These are factors that are likely to shape the short-term direction, but the oil complex probably remains stuck in its current range of $72-$82/bbl basis Brent unless tangibly rising OPEC+ supply incentivizes bears to initiate action or explicit signs of interest rate cuts and/or material supply disruption due to escalating hostilities in the Middle East will provide irresistible temptation for those with bullish propensity.
 

Growing Demand, Growing Supply

The first monthly report of 2024 was released on Tuesday by the EIA, and it did not contain shocking surprises. It concluded that last year saw a global stock build of 670,000 bpd resulting in OECD inventories finishing the year at 2.843 billion bbls, 76 million bbls higher than the preceding year. Consequently, the average oil price was lower last year than in 2022. The inverse relationship between stockpiles and prices was on display once again. The damage would have likely been more severe should OPEC and its allies have not done their best to constrain oil supply. The organization pumped 620,000 bpd less in 2023 than the year before.

The first data that catches the eye for 2024 is that global oil demand estimate was upped by 110,000 bpd and is now seen at 102.46 mbpd, an annual growth of 1.39 mbpd. If anything, it is a vote of confidence in worldwide economic recovery. The heartbeat of this resilient increase in global oil consumption comes from non-OECD Asia with China’s thirst growing by 300,000 bpd this year and India achieving the same growth rate in 2024.

As for non-OPEC supply, the 2024 projection is 1.3 mbpd higher than forecasted in December. This sizeable jump, however, is purely the function of Angola’s decision to leave OPEC. The country’s 1.1-1.3 mbpd output, consequently, has now become an integral part of the non-OPEC group. Supply from outside of OPEC will increase 840,000 bpd year-on-year. It will be worth keeping a watchful eye on US production as it undoubtedly surprised to the upside last year despite earlier calls of limited growth potential due to shifting focus on dividend payouts and share buybacks at the expense of increasing capex. In 2023 US oil production reached a record high of 12.92 mbpd with the last quarter of the year experiencing an output level of 13.22 mbpd. This average corresponds to an annual growth of 1 mbpd. There will be no letup in 2024 although the pace of increase will slow. The EIA forecasts a domestic production level of 13.21 mbpd.

Since global oil demand growth is to exceed that of non-OPEC supply by 550,000 bpd (1.39 mbpd versus 840,000 bpd) the call on OPEC will rise quite drastically for the entire year. With Angola now in the non-OPEC category, it will jump from 26.23 mbpd in 2023 to 26.75 mbpd, an annual expansion of 520,000 bpd. Add to the equation the predicted 270,000 bpd decline in OPEC-12 production in 2024, from 26.90 mbpd to 26.63 mbpd and you’ll find that global stocks will retreat at the rate of 120,000 bpd throughout the year. It has to be pointed out, however, that all of it will be concentrated on 1Q (-810,000 bpd). The 2Q-4Q period is set to undergo a combined stock build of 110,000 bpd. This does not change the fact that OECD stockpiles will deplete over 2024, from 2.843 billion bbls to 2.820 billion bbls, the EIA reckons. Thus, logic dictates, prices ought to average somewhat above the 2023 level. The EIA remains pragmatic, and they see the 2024 Brent price match last year’s average price of $82/bbl, considerably over the current curve.

Numbers, formulas, and equations provide invaluable help to form an idea what the future might bring but given the precarious geopolitical and fundamental backdrop there is no earthly way that these estimates will prove static. Wars in Ukraine and in Gaza, together with the transition from fossil fuel to renewables, the fight against inflation and OPEC’s attempt to tighten the market will lead to volatility and erratic price movements, where both supply and demand will be adjusted on a frequent basis. Given this uncertain backdrop, it might be premature to look as far ahead as 2025. Yet, since the EIA published its first findings for next year it is only sensible to have a quick glance at it. Global oil demand growth will outpace non-OPEC supply increase once again. As a result, the call on OPEC will rise by 320,000 bpd to 27.08 mbpd. Bullish enough? Well, it is not if one considers that the EIA expects OPEC to considerably loosen its supply management and step on the accelerator. The group’s output is expected to shoot up by 720,000 bpd in 2025 leading to a global stock build 270,00 bpd. 

Global consumption will keep registering new annual records going forward not quite matched by non-OPEC supply growth. The relatively disciplined market management of OPEC and its peers might also be seen as a supportive factor this year but lest we forget that there is around 5 mbpd of spare capacity that can be utilized in case of unexpected supply disruption. The EIA forecasts do foretell slightly tighter balance and stronger prices for 2024, nonetheless, the growing number of ‘known unknowns’ and reassuringly healthy supply cushion will ensure limited upside potential.
 

Overnight Pricing

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