Paisie: Oil Demand to Eclipse Supply

John Paisie is president of Stratas Advisors, a global research and consulting firm that provides analysis across the oil and gas value chain. He is based in Houston.

In our June article, we put forth the view that oil prices would move upward, in part because OPEC+ would remain proactive in adjusting supply. During the last month, this view has proven to match actual market dynamics, with OPEC+ further reducing production (mainly Saudi Arabia and Russia) and in response, the price of Brent crude breaking through the 200-day moving average and increasing from $74.65/bbl at the beginning of July to $86.24/bbl at the close of the week ending Aug. 4.

Where oil prices go next will be driven, as usual, by a combination of supply/demand fundamentals and other factors, including macroeconomics, geopolitics and sentiment of oil traders.

We are forecasting that oil demand will outstrip supply during the third and fourth quarters, with global oil demand increasing by 1.9 MMbbl/d during the third quarter in comparison to second-quarter 2023, and by an additional 100,000 bbl/d during the fourth quarter. China’s demand is forecasted to increase by 220,000 bbl/d during the third quarter and by an additional 480,000 bbl/d during the fourth quarter.

While we are forecasting increased oil demand, we are also expecting that the market will remain concerned about the challenges being faced by the major economies (U.S., China and EU).

Although the U.S. economy has been growing, as evidenced by the Commerce Department’s initial estimate for second-quarter GDP growth of 2.4% on an annual basis, nearly half of the economic growth in the second quarter was contributed by consumer spending, which is occurring while consumer debt is at an all-time high, as is the interest rate being applied to the debt.

The latest data pertaining to China’s economy continue to indicate that economic growth will remain muted because of weakness associated with China’s manufacturing sector, slowing growth in the service sector and a debt-ridden property market. Additionally, China’s inward foreign direct investment declined to the lowest level since 1998 in the second quarter.

Europe continues to be hindered by elevated inflation and increasing interest rates, and is likely to face further energy-related challenges in the coming months.

There are increasing geopolitical risks that could affect the oil market. Despite the recent peace talks taking place in Saudi Arabia, the Russia-Ukraine conflict continues, with Ukraine ramping up attacks on territory outside of Ukraine, including the recent attack on Novorossiysk, where Russia has a Black Sea port. It is also near where the Caspian Pipeline Consortium (CPC) operates an oil terminal for transporting oil from Kazakhstan.

While the attack only resulted in a temporary ban on the movement of ships in the CPC water area, such an attack highlights the risk of the conflict expanding and having an impact on oil-related infrastructure. Developments in the Persian Gulf involving Iran exhibit another conflict that presents risks for oil-related infrastructure. Recently, Iran has armed its Revolutionary Guards’ navy with drones and missiles with a range of 600 miles. Concurrently, the U.S. has offered to place guards on commercial ships going through the Strait of Hormuz.

The sentiment of the oil traders has shifted from bearish to bullish. During the last five weeks, the net long positions of traders of WTI positions have increased by 188% and are now at the highest level since April 18. The net long positions of traders of Brent have also increased substantially during this period.

Looking forward, we think that oil prices will moderate moving into fourth quarter, in part, because the gap between demand and supply will not be as great as some market participants are currently expecting. While there have been announced production cuts by some members of OPEC+, other producers have been increasing production. For example, Libya’s production has been restored since the disruption earlier this month from internal conflict. Nigeria’s production reached nearly 1.25 million bbl/d in June, which is an increase of 25,000 bbl/d in comparison to May, and Nigeria is looking to increase production to 1.7 million bbl/d by November. Furthermore, Venezuela increased its oil exports in June to around 716,000 bbl/d, which is an increase of 8% above its May exports. We are also forecasting additional supply from non-OPEC producers.

An upside risk to the price expectations stems from geopolitics that would result in disruption to oil production and oil movement. As highlighted above, such a development could come from the Russia-Ukraine conflict and from the tensions between Iran and the U.S. A downside risk to the price expectations stems from an economic downturn, which remains a possibility, given the underlying fragility of the major economies. A mitigating factor for the upside risk is the spare production capacity that could be brought online in the event of a geopolitical-related event. A mitigating factor for the downside risk is that the central bankers could shift away from tightening to more accommodating monetary policies; however, we view the downside to be a more substantial risk than the upside.