After all, it is possible to put a price on 0.1%. This is by how much the May US core inflation reading exceeded expectations. Consumer prices, without food and energy, rose by 3.4% last month, better than the anticipated 3.5%. Oil jumped nearly a dollar, admittedly helped by the morning’s monthly IEA report. The dollar weakened nearly 1%, stocks rallied more than that, and bond yields descended. Hopes of a September rate cut brightened but after the US central bank left interest rate untouched and the median rate-setter has only foreseen one cut in the cost of borrowing this year pragmatism prevailed, risk assets retreated, and sentiment soured somewhat. In the Fed’s view this is the price that needs to be paid to achieve a soft landing and avoid recession beyond doubt.

Yet, oil managed to finish the day in positive territory, notwithstanding genuinely awful mid-day statistics from the EIA on US oil inventories. Contrary to forecasts, crude oil inventories rose because of a sizeable rise in imports, particularly from Mexico. The build in gasoline stockpiles also contradicted the API’s finding and the market view whilst distillate stocks increased by a mere 890,000 bbls. The jump of 11.5 million bbls in commercial stocks suggests that the long-awaited depletion in OECD countries has not started yet. The market reaction and the respectable advance in oil prices indicates that rising demand and the subsequent fall in the volume of oil stored worldwide is the question of when and not if, but just like the lowering of interest rates, it will come later than anticipated and the path higher will not be a straight line.

Buoyant Present, Bleak Future - IEA

The narrative on future oil use and oil balance from the IEA is somber at best and grim at worst, yet the gut reaction to the release of the latest reports from the energy watchdog of the industrialized world was one of hope and optimism – and for a good reason. We shall dive into the medium-term prospects next week, for now it is sufficient to note that the agency expects unprecedented surplus global supply capacity by 2030, chiefly because the transition from fossil fuels to renewable energy will put a serious dent in demand growth, as the executive summary of the Oil 2024 publication emphasizes.

This discouraging backdrop is already being felt as early as next year, the IEA believes in its regular monthly Oil Market Report. For 2025 the growth in non-DoC supply will comfortably exceed the increase in global oil consumption. The former will grow by 1.45 mbpd with DoC other liquids at +50,000 bpd. Demand, on the other hand, will ascend from 103.20 mbpd in 2024 to 104.23 mbpd next year. Naturally then, the demand for oil produced by the OPEC+ group will decline from 41.88 mbpd to 41.40 mbpd year-on-year whilst output from the alliance is widely believed to increase due to the unwinding of the 2.2 mbpd voluntary supply cuts between October 2024 and September 2025. In the words of the authors of the report ‘next year could see gains of 1.8 mb/d in total, with non-OPEC+ up 1.5 mb/d and OPEC+ 320 kb/d higher. With oil demand expected to remain weak, supplies may have to be adjusted lower next year, rather than higher.’

The second half of the current year, however, is in stark contrast with the perceived, sluggish global oil balance further down the line and probably it is the shorter-term that plays a more salient role in driving present oil prices. There was no major drama in amending either global demand or non-DoC supply for the coming two quarters although the outcome of the latest OPEC meeting was accounted for in DoC production figures. Yet, the end result is very similar to the EIA’s view. And that is a semi-decent supply deficit comprised of DoC calls of 42.3 mbpd for 3Q and 41.9 mbpd for 4Q with predicted DoC production at 41.6 mbpd and 41.7 mbpd. Global oil inventories are then to deplete at the rate of 700,0000 bpd and 200,000 bpd or 450,000 bpd for 2H, nearly matching the EIA’s estimate of 520,000 bpd.

OPEC, as chewed over in yesterday’s note, is the outlier – but not direction-wise. The organization also expects global oil inventories to plunge in the next six months but at a much faster pace than the other two. In 3Q the rate of fall is to be 2 mbpd with the 4Q figure seen at 2.2 mbpd. This divergence lays bare the fundamental difference of how the IEA and OPEC view the impact of transition on oil consumption – and consequently on future oil exploration and production. Given the precariousness and the unpredictability of this progress one must brace himself/herself for frequent adjustments. The mea culpa from the IEA a few months ago on underestimating global oil demand is still remembered vividly. But back to 2024, the key take aways of the latest set of reports are that a.) inventories ought to start thinning as the second half the year gets under way and b.) there is a conspicuous consensus that this year will plausibly turn out tighter than 2023, in the latter part of which front-month Brent averaged $84.40 compared to the current 2H 2024 curve of around $81.00.

It is, therefore, only prudent to maintain the recent view that the risk is currently skewed to the upside whilst acknowledging that numerous ‘known unknowns’ can upend this sanguine prognosis. It also needs to be noted that although there is a bright backdrop developing, the comfortably adequate spare production capacity from OPEC will cap any price rally somewhere in the $90-$95/bbl range basis Brent, together with potential upward revisions in non-DoC supply should prices approach and remain around the higher end of this year’s range for a protracted period of time.

Overnight Pricing

© 2024 PVM Oil Associates Ltd