The most potent ingredient in yesterday’s bullish oil cocktail was unconditionally a bearish set of weekly oil inventory data, which, however, was less gloomy than the API figures from the previous night. The exotic spice in this elixir was the 2.5 million bbls drawdown in crude oil inventories, most of which took place in PADD 2 and within that Cushing providing an invaluable boost not only for WTI outright prices but the structure, too. Rising weekly crude oil exports that broke above the 5 mbpd mark are an unmistakable sign of the role US crude plays in replacing Middle East barrels as voyage time and insurance are on the rise due to the Red Sea atrocities. WTI discount to Brent has narrowed almost 90 cents/bbl in the last two days. As for the rest, product stockpiles grew bigger and commercial oil stocks in the US registered a 2.8 million bbls increase with proxy demand staying under 20 mbpd.

This cocktail was sprinkled with brewing Middle East tension and a decent jump in US equities. In addition to the ongoing Israeli onslaught of Palestinians and the continuous Houthi attacks on commercial vessel in the Red Sea together with reciprocal US countermeasures, skirmishes between Pakistan and Iran also raise the region’s geopolitical temperature. Ascending US equities had their part in WTI rallying $1.52/bbl and Brent closing $1.22/bbl higher, however, this strength is as tentative as the jump in oil prices. The tight US labour market might force the Fed to push out rate cuts, something that its European counterpart also contemplates. The return of risk appetite has all the hallmarks of bottom pickers being attracted back to the market, not because it is fundamentally justified but simply because the lower end of the current trading range was in sight.

Solid Demand, Consensus View on Supply

It has turned into a cliché that uncertainty will be the prominent feature of the oil market in 2024 – this, however, does not make the observation untrue. China, the wars in Ukraine and around the Middle East, the inflation-interest rate-dollar trifecta and the transition from fossil fuel to renewable energy are all weighing considerably on investors’ mind. The precariousness they cause is unequivocal. These factors have not played a salient role in the formation of oil prices for decades if not longer, there is nothing to fall back on for comparison: China has been deemed as the engine room of oil demand growth, not anymore, there were no simultaneous wars around production centres in living memory, inflation have not matched the 2022 peaks for over 40 years and climate change has not been a pivotal issue until recently. It is, therefore, comprehensible that predicting future oil demand and supply has become more of an art than science, it is based on assumptions rather than facts and as with any piece of artefact, its interpretation is subjective and even biased. The ostensibly diverging views on balances are aptly mirrored in the monthly updates on the state of the global oil market.

Even the past is ambiguous. OECD inventories form the basis of any oil price forecast and there is a conspicuous gap in estimates between OPEC and the IEA as where stockpiles in the developed part of the world were at the end of November. The former puts it at 2.819 billion bbls, the latter at 2.790 billion bbls, an unusual discrepancy. Given that US commercial inventories declined in December OECD stocks will also plausibly see depletions when the next set of reports are released in February. Shifting focus to the incumbent year, the tangible disagreement on demand but not so much on non-OPEC supply growth has been brought over from 2023. There is a consensus on consumption in that both agencies expect an increase, the extent of it, however, widely differs: OPEC puts the year-on-year growth at 2.25 mbpd and the IEA at 1.28 mbpd. OPEC saw the 2023 absolute figure 410,000 bpd higher than the IEA and this contrast is ever more visible this year. OPEC places the 2024 global oil demand at 104.36 mbpd whilst the IEA at 102.98 mbpd.

So, global oil demand will be price supportive for this year, simply because it will grow, its impact, nonetheless, is open for debate. Projections on non-OPEC supply are closer to one another. After removing Angola’s output of around 1.3 mbpd from the OPEC group and shift it to the non-OPEC producers’ category one will find that OPEC expects non-OPEC supply to grow by 1.33 mbpd in 2024 to 70.40 mbpd whilst the IEA by 1.28 mbpd, to 70.38 mbpd – a good effort to consolidate views.

As encouraging as it sounds, it is the big picture, the difference between global oil demand and non-OPEC supply, the call on OPEC, that is much more relevant than either consumption or production in isolation. What really stands out is that OPEC still anticipates demand growth to outpace that of supply (2.25 mbpd vs 1.33 mbpd) whilst according to the IEA they will go hand in hand (1.28 mbpd). Hence, it is only natural that OPEC expects a much healthier demand for its oil than the IEA – for the first half of 2024 28.17 mbpd compared to 26.75 mbpd and 28.49 mbpd against 27.05 mbpd for the whole of the current year. Estimates on OPEC calls usually provide a helping hand in predicting the possible modus operandi of the alliance but given these considerable fluctuations in forecasting such an assignment turns into a mere guessing game.

Maybe the most reasonable approach is to go by OPEC’s numbers, after all it is its own estimates that the group presumably relies on when forming a strategy. In Monday’s note we will attempt to undertake the arduous and thankless task of presenting different scenarios of what might OPEC decide to do this year and next based on its own research and analysis. Some seemingly equitable scenarios will result in such unexpected outcomes that one will ponder how practical OPEC’s predictions are.
 

Overnight Pricing

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