Since our article in the August Oil and Gas Investor, oil prices have been volatile for several reasons, including concerns about the strength of demand because of disappointing economic news, and especially so with respect to China.
- The National Bureau of Statistics (NBS) purchasing managers’ index (PMI) for manufacturing decreased to 49.4 in July from 49.5 in June, which is the third consecutive month of contraction (readings below 50 indicate contraction).
- China’s non-manufacturing sector is also showing signs of stress, with the NBS PMI, which includes services and construction, decreasing to 50.2 from 50.5 in June.
- While the economy has been stagnating, it does not appear that the Chinese government is planning to provide any significant economic stimulus; instead the government is indicating that the focus will remain on long-term goals, which include the development of advanced technologies.
The concerns about demand were further exasperated by the weak July jobs reports, which showed that the U.S. added only 114,000 nonfarm jobs in July, and the number of jobs added in June was revised downward to 179,000. For the previous 12 months, the monthly increase in jobs averaged 215,000. Additionally, the unemployment rate increased to 4.3%, which is the highest since October 2021.
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Coupled with the disappointing economic news were concerns about the alignment of oil supply with demand. While OPEC+ announced that it was maintaining its current supply cuts, the cartel also stated the voluntary cuts of 2.2 MMbbl/d would be phased out starting in October 2024. These factors pushed oil prices downward through July and the beginning of August, with the price of WTI decreasing from $83.88/bbl on July 3 to $72.54/bbl on Aug. 5.
Oil prices started rebounding from the lows in the following week with data pertaining to the U.S. service sector surprising to the upside. The PMI for non-manufacturing released by the Institute for Supply Management (ISM) came in at 51.4 for July from 48.8 in June with a strengthening in new orders and the first uptick in employment since February of this year.
Additional support has been provided by crude inventories in the U.S. being drawn down for six consecutive weeks and inventory levels falling below the five-year average. Moreover, the geopolitical situation in the Middle East has become more precarious with concerns that Iran and Hezbollah could attack Israel in response to recent high-profile attacks undertaken by Israel. The risk of a wider conflict is also increasing, with the potential for Iran to get direct support from China and Russia.
The U.S. is already involved in the conflict with two aircraft carrier groups and a guided missile submarine in the region, and has previously helped Israel defend against the Iranian missile attack in April in response to Israel assassinating high-level Iranian officials in Syria.
While the geopolitical risk premium has increased, we are not expecting any major price spikes because we do not expect any material disruption to the volume of oil being put into the market. And despite the concerns about the resiliency of the global economy, we are maintaining our forecast that oil demand for 2024 will increase by 1.2 MMbbl/d in comparison to 2023. We are also forecasting that demand in the fourth quarter will be 2.08 MMbbl/d more than in fourth-quarter 2023.
Coupled with our expectations for supply, we are forecasting that demand will outstrip supply by 1.32 MMbbl/d during the third quarter, and by 1.62 MMbbl/d during the fourth quarter. Therefore, we think supply/demand fundamentals will be supportive of higher oil prices during the remainder of the year, with the price of Brent moving back to around $85/bbl and the price of WTI moving above $80/bbl.
As we pointed out in August, there are risks to the price forecasts. Besides the possibility of geopolitical shocks stemming from the Middle East—as well as from the Russia-Ukraine conflict—there are risks pertaining to the supply/demand fundamentals, most notably downside risks.
China’s oil demand could continue to disappoint as it did in the second quarter when demand, in comparison to second-quarter 2023, was slightly negative. With respect to oil supply, OPEC+ faces the inherently difficult challenge of getting its members to comply with the agreed quotas.
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