It is almost an eternal truth that the price of risk assets falls quicker and harder than it climbs. This mantra was clearly evident over the last few days when front Brent dropped $4.5/bbl in 3 sessions between last Thursday and this Monday and have not been able to reclaim even half of these losses in the following three days. The bounce from Wednesday’s lows has been tepid, and yesterday’s ascent was unconvincing. The monthly IEA report, discussed below, was not a morale booster and without the weekly statistics on US oil inventories the major oil contracts would have probably settled lower. Gasoline supported the whole complex. Inventories in the motor fuel dropped 4.4 million bbls as refiners supplied 9.4 mbpd, a weekly increase of 555,000 bpd. Gasoline inventories are the lowest for 2 years. The 1.4 million bbls draw in distillate stocks was coupled with an unexpected rise of 2.1 million bbls in crude oil stockpiles. On balance, it was a bullish report that was met with a lukewarm reaction. And rightly so. Overnight, China served a timely reminder about the true state of its oil sector. The country’s refinery throughput declined for the seventh successive month in October. Although retail sales stabilized last month in the world’s second biggest economy, industrial output growth decelerated adversely impacting the need for foreign crude oil.

On the financial front stocks consolidated as the euphoria that followed last week’s US election makes place for cooler heads. The Republican party retained its majority in the House of Representatives and will dominate all three branches of the government at least for two years. It will hand an enormous leverage to the incoming president to push through his campaign pledges, which include tax cuts, the deportation of illegal migrants and erecting trade barriers. The new administration will have its work cut out as it seems that inflation stopped retreating. After consumer prices rose 2.6% in October, producer prices increased 2.4% on the year. Should Donald Trump’s policies pour more fuel on the inflationary fire, investors will be quick to vote with their dollar. Amongst these uncertainties, the Fed chair implied that further rate cuts are not a foregone conclusion. It might just be that the post-election honeymoon period will come to an end shortly, and harsh reality will set in.

Builds or Draws, that is the Question

The diverging paths have not gotten more aligned. With all three agencies having released their latest findings on the health of the oil market, the cleavage in opinions remains as wide as ever. The forecasters stuck to the recent narratives. The IEA and the EIA remain disheartened about next year’s progress whilst OPEC takes a much more upbeat view. To rephrase the above sentence, the former two agencies would expect global demand growth to underwhelm the increase in supply outside the OPEC+ group. Still, the latter keeps displaying an opposing view. As a result, the first two anticipate falling demand for OPEC+ oil, whilst OPEC is very optimistic about its and its allies’ prospects. Approaching the latest data set from another angle, the EIA and the IEA foretell increases in global and OECD oil inventories, but OPEC envisages significant drawdowns.

We have touched upon both the EIA and the OPEC reports in recent days. The IEA revised its 2024 global oil demand growth forecast by 60,000 bpd higher to 920,000 bpd as it sees healthier gasoil demand from the developed part of the globe. For next year the world will need 970,000 bpd more oil than in the current one. Despite the growth, these are historically sluggish estimates, and the blame is pinned on China. For the third quarter of 2024, the world’s second-biggest economy will consume 270,000 bpd less oil than in the comparable period of 2023. Note that OPEC sees Chinese demand expanding by 400,000 bpd this year to 16.8 mbpd and by an additional 300,000 bpd in 2025. The compounded growth rate of 700,000 bpd from 2023 to 2025 is nearly matched by India in absolute terms and comfortably exceeded in percentage terms. Oil demand in the world’s most populous country will rise from 5.3 mbpd last year to 5.8 mbpd next. It is a growth of 10% compared to China’s 4% and India might well be the beating heart of oil demand growth in the coming years.

Views widely differ, yet certain trends are ubiquitously aligned, and they paint a bleak picture. Every forecaster has been progressively amending its view on oil demand growth to the downside, both for this year and for next. OPEC predicted a 2024 demand growth of 2.24 mbpd back in March. It is now 1.83 mbpd. As mentioned above, the IEA projects a rise of 970,000 bpd in 2025 consumption. This compares with 1.12 mbpd in March. The non-DoC supply side of the oil equation shows the reverse direction of travel. For both years non-DoC supply growth has edged higher between May and November. (May was the month when we switched from non-OPEC to non-DoC supply.) The direct consequence of diminishing demand and increasing supply growth rates is a sizable hit on the OPEC+ call. Even the most sanguine forecaster, OPEC, admits that past estimates on OPEC+ proved overzealous. They predict a call of 42.15 mbpd for the alliance’s oil in 1H 2025, which compares with 43.20 mbpd five months ago.
The changes in prognosis, however, did nothing to help build a consensus on actual demand for oil or stock changes. The IEA believes that global oil inventories will rise at the pace of 1 mbpd in 2025 even if OPEC+ decides to leave cuts in place. The producer group, on the other hand, advocates that stockpiles worldwide will drain by the exact same amount next year. This is a swing of 2 mbpd, which makes oil price forecasting based on projected stock levels an onerous and perilous exercise. Running the numbers from both sets of data through our formula gives us a price gap of nearly $40/bbl for 1Q 2025, more or less $20/bbl on either side of the current value of the curve.

The outlook and therefore trading conditions are ambiguous. There is a cornucopia of moving parts that prevent the market from falling further. These are geopolitics, the new US administration’s foreign policies on Iran and Russia. Then there is the element of what if OPEC’s projections turn out to be more accurate than currently believed or if OPEC keeps oil off the market throughout 2025. These factors might set a floor under the market. Yet, tentative optimism will hastily evaporate if the Trump administration's protectionist policies prove inflationary or OPEC decides to re-claim voluntarily conceded market share. However, the most relevant factor why we do not believe in a protracted rally is the more than sufficient spare production capacity in the Middle East. Any attempt to push prices considerably above $80/bbl basis Brent will be greeted with more than willing sellers initiating action.

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