(+) Oil – supply and demand

Is the big supply deficit expected for second half of 2023 a solid enough foundation to sustain even higher prices going forward?

We expect crude oil inventories to draw in the second half of 2023, before flattening out in the first quarters of 2024, then increasing at the end of second half of 2024. Saudi led OPEC+ production cuts has been successful, although we see a small pull-back in crude prices last week.

The fear of supply deficit has pushed past the global economic outlook, but the markets are still in suspense as we move deeper in the second half of 2024.

Historically oil price rallies beyond the $80 marker are driven by fears that supply cannot meet the future demand. OPEC+ production cuts could be balanced out by non-OPEC+ members as output growth is expected to meet global demand growth later, in the second half of 2024 if the stagnant consumption growth in OECD countries continues. US, Guyana, Brazil and Canada adding most of the barrels of non-OPEC+ capacity
growth in crude supply in 2024 and 2025.

It’s a battle between market participants as to the supply and demand question. Bullish participants see a continued, steady growth in China and India, with a weaker inflation. The IMF recently increased their GDP forecast, helped booster the bulls conviction. The bearish participants see a well-supplied market, with weaker demand signals in relation to supply. With this signal Brent could pull back to $80 and lower.

The market balance is tight, the debate is how tight. Two major agencies, the International Energy Agency (IEA) and OPEC have a wide varianc outlook on future demand. OPEC sees a demand growth of 2.2 Mbpd In 2024, while IEA sees 1.1 Mbpd in 2024. With such wide variances oil price could be in the range of $70 to $90/bbl. Giant producers like, Iraq, Nigeria and even Iran could boost supply if demand is unexpected
strong, depending on US sanctions.

Expected Q4 demand Mbpd:

OECD – 46.5

Non-OECD – 56

Total – 102.5

Expected Q4 Supply Mbpd:

Total – 101.5

The markets are split on the future price of Brent. Long positions are increasing, but so are short positions.

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