The stage is set for a fall of a few dollars in oil prices. Why? Because of deteriorating economic conditions, as illustrated by the recent weakness in equities. The Nasdaq Composite Index lost 1.90% yesterday, while its cousin, the S&P 500 Index, finished the day 1.12% lower. After a series of grim manufacturing data, attention turned to private-sector US job figures, and they appeared equally bleak. According to Challenger, Gray and Christmas, the US economy shed 153,000 jobs last month, the highest number for the period in the past 20 years.

With consumer prices stubbornly above the 2% target, the debate about a Fed rate cut in December is being reignited. Unless the health of the US economy becomes clearer, meaning the reopening of the government and the release of crucial economic data, risk appetite will likely remain suppressed.

When growth prospects deteriorate, oil prices usually weaken. That did not happen yesterday. Therefore, the second question that needs prompt answering is when prices will start drifting further south. It is a safe bet that such a move will begin in earnest once the rug is pulled out from under refined products. As Argus Media aptly outlines, their support, particularly for the middle of the barrel, comes from several directions.

Russian diesel exports are declining as attacks on the country’s refineries continue, the latest of which targeted the Volgograd refinery. Citing market intelligence firm Kpler, Argus reports that Russian 10ppm diesel exports fell in October to their lowest level in at least nine years. Bulgaria, complying with US sanctions against Russian oil companies, has temporarily suspended diesel and jet fuel sales. Gasoil and distillate stocks have also declined over the past week in both Europe and the US.

The net result has been a significant rally in Heating Oil and Gasoil prices. No doubt, the eventual fall will be equally brutal, but the timing of it remains highly uncertain.

The Present is Uncertain, the Future is not So Much – Pre-COP30 Roundup

Talks of a supply glut have been prevalent for some time now, yet oil prices refuse to approach the year’s lows. The structure of the main oil futures contracts, both crude and products, remains in backwardation, although the front-month premium has narrowed somewhat lately on Brent and WTI. The same pattern is evident in the physical Brent market: it still trades at a premium to forward contracts, but the gap is not as wide as it was a week ago.

Signals from one of the most pivotal oil producers, Saudi Arabia, are ominous, as the Kingdom has lowered its official selling prices to its main market, Asia, by more than a dollar. On the other hand, constant and effective assaults on the Russian refining sector continue to cause supply and export disruptions in products, particularly distillates, ahead of the winter season. This supports strong crack spreads and healthy refinery demand for crude oil. The anticipated supply glut has been consistently postponed for most of this year, and the swelling of global and OECD inventories has yet to materialise.

On one hand, there is an ostensible gloom and a projected supply surplus pencilled in for early next year; on the other, a widespread reluctance to fully embrace these expectations. The immediate outlook is ambivalent, something that cannot be said for the medium term. There is a ubiquitous view that global oil demand will remain stronger in the coming decades than believed before Russia invaded Ukraine. Meanwhile, the voices warning of an investment gap in oil exploration and production are growing louder, while those predicting imminent peak oil demand have become a visible minority.

In hindsight, this reversal in sentiment is not surprising. Global warming and climate change are undeniable scientific facts, but how best to address them remains the subject of fierce debate. Conflicting interests must be balanced, whilst it has to be acknowledged that the world has changed profoundly over the past three years. First, Russia’s invasion of Ukraine has likely set the transition from fossil fuels to renewable energy back by more than a decade, simply because energy security has, justifiably, become the top priority for most governments. Second, the rapid rise of data centres and the corresponding surge in power demand have led to upward revisions in forecasts for oil and natural gas consumption, even as the share of wind and solar in electricity generation continues to climb.

To put it bluntly, the pledge of the 2015 Paris Climate Accord, to limit global warming to 1.5°C above pre-industrial levels, will not be achieved and now appears illusory. This has been acknowledged in the annual Emission Gap Report released by the UN Environment Programme (UNEP), which concluded that, given the lack of decisive action to reduce greenhouse gas emissions and considering governments’ latest pledges, global warming is projected to reach around 2.3–2.5°C. These revised assessments are reflected in policy changes as well. Canada, for instance, is considering scrapping its cap on oil and gas emissions and replacing it with other measures such as stricter carbon pricing and expanded carbon capture and storage initiatives.

This change of heart was clearly reflected in the views expressed at this week’s ADIPEC energy conference in Abu Dhabi. OPEC Secretary-General Haitham Al Ghais remains upbeat about oil demand prospects, while ADNOC’s chief executive believes demand will stay above 100 mbpd through 2040. TotalEnergies, in its annual energy outlook, projects positive demand growth up to 2040, followed by a gradual decline that still keeps consumption above 98 mbpd by 2050, an 8 mbpd upgrade from last year’s forecast.

The present and immediate future are not only ambiguous but also confusing, and perhaps even misleading. The US Department of Energy’s deputy secretary does not foresee an oil glut next year, whereas his department’s own landmark monthly publication estimated a global stock build of 2.07 mbpd in its October outlook (an update is due Tuesday), implying OECD inventories could rise to 3.163 billion barrels by end-2026.

In the coming years and decades, however, robust oil demand, as outlined above, appears likely. Given that investment in exploration and production has taken a back seat in recent years and that the annual decline rate for conventional oil fields stands at about 5.6% (IEA), a supply deficit, a tight oil balance, and prices approaching $100/bbl may well define the 2030s, ironically helping to accelerate the energy transition further down the line.

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