KUWAIT: Oil prices finished higher in June, lifted by resurfacing geopolitical tensions and the prospect of rate cuts by key central banks in H2. Brent erased its post OPEC+ meeting losses, when the oil producers’ group announced an unwinding of 2024’s voluntary supply cuts from Q4. However, global oil demand growth estimates in 2024 were downgraded by the IEA to a below-trend 1 mb/d on muted economic activity and increasing renewable energy.
Brent futures closed higher in June, posting gains of 5.9 percent m/m to reach $86.4/bbl (+12.1 percent ytd), their highest level in two months. Prices recovered from their sharp post-OPEC+ meeting falls of early June when markets grew concerned that the group’s decision to unwind 2024’s voluntary production cuts from October 2024 onwards and into 2025 would push the market into surplus territory. But by June’s close, geopolitical risk was back in the frame with tensions flaring up between the Zionist entity and Hezbollah in Lebanon while Yemen’s Houthis continued their attacks on Red Sea shipping. Local marker Kuwait Export Crude (KEC) ended June up 4.8 percent m/m at $87.9/bbl (+10.5 percent ytd).
In the futures markets, the negative reaction by speculators and money managers to the OPEC+ supply cut unwinding decision was striking. By the 4th of June, Brent crude money manager net length (the difference in the number of ‘long’ contracts and the number of ‘short’ contracts) had plummeted to 45.7K, the lowest level in almost ten years and beyond even the severity of the bearish drop associated with the COVID-19 pandemic in March 2020.
This was driven primarily by a surge in short selling positions, as speculators rushed to trade on the belief that higher OPEC output would tip the market into a supply surplus and pressure prices downwards. As June wore on, however, this pattern reversed, with net length once more increasing. Short-term oil demand growth forecasts from major energy reporting houses the International Energy Agency (IEA) and OPEC continue to diverge.
At the more conservative end, the IEA, in its June oil market report, sees oil demand growing by 960 kb/d in 2024, a downward revision of 100 kb/d from its estimate a month earlier. The IEA cited weaker gasoil deliveries in the OECD in Q1 2024 amid ongoing oil inventory builds. For 2025, the agency estimates that oil demand growth will remain subpar and below historical norms at 1 mb/d due to a relatively weak global economy and ‘accelerating clean energy technology deployment’.
In contrast, at the more bullish end of energy forecasters is OPEC, which kept unchanged its oil demand growth projection of 2.2 mb/d in 2024 and 1.8 mb/d for 2025. Most of the growth is seen originating from non-OECD economies and led by gains in jet fuel and petrochemical feedstock consumption especially. In June the IEA also published its medium-term oil market forecast (‘Oil 2024’) report, in which it projects world oil demand growth slowing progressively over the next six years, from 2.6 mb/d in 2022 to -0.2 mb/d in 2030.
Controversially, the IEA therefore sees consumption peaking before the end of the decade, at 105.6 mb/d by 2029, as uptake of clean energy technologies accelerates. This is a view that is not shared by OPEC or the oil industry more generally. OPEC’s Secretary General, Haithem Al-Ghais, went so far as to refer to the IEA’s messaging as "dangerous commentary...that will only lead to energy volatility on a potentially unprecedented scale”.
The fear is that talk of ‘peak oil demand’ would deter investment in fossil fuels which OPEC and others believe is still crucial during this time period. Moreover, the IEA says that with demand growth slowing down and amid stronger non-OPEC supply growth (+6 mb/d to 113.8 mb/d by 2030), the oil market of 2030 is likely to be one in which supply capacity will exceed demand by 8 mb/d.
In May, OPEC+ production (quota members only) fell by 125 kb/d m/m to 34.1 mb/d, according to OPEC secondary source data. The decline was led mainly by Russia (-119 kb/d) and Kazakhstan (-62 kb/d), and only partially offset by increases in Nigerian production (+74 kb/d) as the country looks to increase supply to its recently-completed Dangote refinery. Kuwait, for its part, continued to pump at its quota level of 2.41 mb/d, according to official sources. In line with the OPEC+ schedule, Kuwait will be able to gradually unwind its 2024 supply cuts from Q4, at the rate of 11 kb/d every month to September 2025.
In the US, crude production rose to 13.2 mb/d in June, largely matching the Energy Information Administration’s (EIA) 2024 annual average production estimate. For 2025, the EIA expects output to rise by 500 kb/d to 13.7 mb/d, one of the slowest rates of increase in several years—and in line with the trend of falling oil rig counts, an indicator of future production. The oil rig count fell to 479 by the close of June, its lowest level since late 2021.
We maintain our forecast for Brent to average $85/bbl in 2024, helped by what should this quarter be solid oil demand and tighter market balances. From Q4 onwards, market balances are expected to loosen with the scheduled unwinding of OPEC+ supply cuts, but these will only take place, OPEC+ says, if market conditions warrant them and at a pace slow enough to make the effect on balances and prices limited and manageable.
Downside risks to the price outlook are worth highlighting, however. The most important is global economic growth and the potential for activity to underwhelm in H2 2024, which would likely require non-OECD and especially Chinese economic growth to slow. Partially offsetting this, though, would be the fairly good prospect of an uptick in economic activity in OECD countries, helped by looser monetary policy. Higher non-OPEC supply, led by output gains in the US, Canada and Brazil, cannot be discounted, either, for its potential to upset the OPEC+ equilibrium and pressure prices downwards. We see these gains as being limited in 2024, however.