KUWAIT: Oil prices have retreated well below their mid-year highs, now ranging in the low to mid-$70s amid predominantly bearish sentiment linked to worries about a potentially oversupplied market due to softer oil demand growth. This drop came despite a resurgence in geopolitical risk stemming from an escalation in hostilities between Zionist entity and Iran.
China’s economic troubles have been central to the weaker demand narrative, even as economic activity in the US and other advanced economies is supported by monetary policy easing by the US Fed and the ECB. International energy institutions the IEA and OPEC have, nevertheless, lowered their oil demand growth forecasts for 2024 and 2025, with the former projecting an oversupplied market in 2025 amid ongoing non-OPEC supply gains and irrespective of OPEC+ production policy decisions. OPEC, for its part, with one eye on prices and the other on global inventories, rolled over its 2.2 mb/d of output cuts twice in recent months and now sees January 2025 as the month in which to begin resupplying the market. The outlook for prices in 2025 is lower in this scenario, with Brent expected to average around $70/bbl, down from an expected $80 in 2024 and $82 in 2023.
Macroeconomic concerns
Oil prices fell sharply in Q3 2024, weighed down by concerns over the health of the global and Chinese economies in particular and the weakening prospects for oil consumption. International benchmark Brent shed almost 17 percent in Q3, closing the quarter at $71.8/bbl, having dropped briefly to a near-three-year low of $69 in early September following the release of weak Chinese data. Local marker Kuwait Export Crude (KEC) shed 15.5 percent q/q to close Q3 down at $74.3/bbl.
Further reinforcing the negative sentiment, OPEC, for the first time since setting its 2024 forecast, revised oil demand down in August, citing weaker than expected Chinese consumption. The organization has since followed this up with two further demand downgrades. Brent did tick up in October (+1.9 percent), ending the month at $73.2/bbl, but this was almost entirely a reflection of the Zionist entity-Iran confrontation, which threatened at one point to escalate to a direct strike by the Zionist entity is on Iran’s nuclear or oil facilities. A hit on the latter would almost certainly have knocked out some Iranian supply and sparked a retaliation that could have endangered the crude production or processing facilities in the GCC.
Hedge funds
With oversupply concerns uppermost in traders’ minds, hedge funds turned net bearish on Brent in Q3 for the first time on record, according to trading data published by the International Commodities Exchange (ICE) Europe. In the week ending 10 September, the volume of ‘short’ contracts exceeded the number of ‘long’ contracts by 12,680.
This difference, known as net length, remained negative in the subsequent week as well (-8,141) and is the only time in data that goes back to 2011 that such a phenomenon has occurred. The bearish gauge was not limited to crude either: money managers were net short in diesel (-38,609 lots), while in gasoline the net long position (+5,193 lots) was the least bullish in more than seven years. Brent net length was back in positive territory in October and November as speculators rushed to establish long positions amid resurgent geopolitical risk in the Middle East.
Demand
Oil demand growth estimates were revised down in Q3 and again in October by the major reporting organizations as global economic prospects turned more uncertain and as China’s economy looked to be in a weaker state than earlier thought. The International Energy Agency (IEA) now sees oil demand growing at about 0.86 mb/d in 2024, a steep decline from 2.4 mb/d in 2023 and well down on the historical annual average. In 2025, the IEA thinks there may be only a modest increase in oil demand growth, at 1 mb/d. (Chart 3.) For context, the IMF, in its October World Economic Outlook, while acknowledging the resilience of the global economy, explained that its forecast for economic growth, at 3.2 percent in both 2024 and 2025, is underwhelming.
The downgrade to oil demand growth by the OPEC secretariat, was perhaps more telling, given that the organization had pushed back against the weakening growth narrative with a far more bullish 2024 growth estimate of 2.25 mb/d that it had maintained for more than a year. In October, it brought that down to 1.93 mb/d for 2024, which is still an eye-catchingly wide divergence from the IEA, and 1.64 mb/d for 2025.
China’s underwhelming economic performance in 2024 has been central to the weakening growth narrative. The government has unveiled a series of stimulus measures to kick-start the economy, albeit a modest one, aimed at the real estate sector specifically and consumption more broadly. The downturn in economic activity was visible in the year-over-year declines in both crude oil imports and refinery runs, the former by more than 10 percent in September.
The IEA reckons oil consumption in China was, at the last reading in August, trending around 3 percent lower (-500 kb/d) compared to the same period last year, such that its contribution to oil demand growth this year will be limited to 20 percent rather than 70 percent as it was last year. The IEA also went further than others in arguing that oil demand weakness in China is not just cyclical, but also structural, with natural gas and batteries increasingly replacing oil and its products, notably diesel, in the transportation sector.
Supply
OPEC+ extended voluntary cuts by two months in September and again, by one month, in November. Faced with weakening oil demand, an oversupplied market and the prospect of oil inventories building up, OPEC+ in September felt compelled to delay by two months to December the 2.2 mb/d of voluntary production cuts that were due to be unwound. Amid ongoing demand weakness and oil prices ranging in the low $70s, the OPEC Secretariat recently announced a further extension of these cuts by one month to January 2025.
According to OPEC secondary sources, crude production from the 22-member OPEC+ group (officially retitled Declaration of Cooperation members, DoC) fell by 560 kb/d in September to 40.1 mb/d. Production among the 18 DoC members subject to quotas (excludes, Iran, Libya, Venezuela and Mexico) dropped by 171 kb/d m/m to 33.8 mb/d. (Chart 5.) Libya and Iraq were responsible for the bulk of the declines (-410 kb/d and -155 kb/d, respectively), the former due to the imposition of force majeure at oil fields and terminals as its two rival governments disputed leadership of the country’s central bank, and the latter due to OPEC+ compensatory cut obligations. Iraq, though, even with production reduced to 4.1 mb/d in September, remains well off its post-compensatory cut quota of 3.9 mb/d.
Russian production, meanwhile, trended lower for the sixth consecutive month in September, reaching a multi-year low of 9.0 mb/d, which is only 23 kb/d above its own quota. Leading the gainers, however, was Kazakhstan, which raised its output by 75 kb/d to 1.54 mb/d in September — and further away from its own compensatory cut target of 1.40 mb/d. It is looking doubtful whether Kazakhstan — or Iraq for that matter — will ever make good on their pledge to compensate the group for months of overproduction. The two oil producers agreed with the OPEC Secretariat to implement additional production cuts worth 2.1 mb/d during August 2024-September 2025 but are yet to make meaningful headway with this, much to the irritation of other group members hoping to move ahead with unwinding of 2.2 mb/d worth of voluntary cuts in the knowledge that the impact on global balances could partly be offset by these deeper cuts.
Meanwhile, outside the DoC grouping, both OPEC and the IEA agree that supply growth has been robust, led predominantly by increases in the so-called ‘Americas quartet’ of the US, Canada, Brazil, and Guyana. According to the IEA, these four producers will account for 75 percent of non-OPEC+ supply growth, pegged at 1.5 mb/d and 1.6 mb/d in 2024 and 2025, respectively. It is worth noting that supply gains from non-DoC regions alone will comfortably outpace the projected increase in oil demand over this period, which is why the IEA has the ‘call’ on OPEC+ (the volume of crude that OPEC+ needs to produce to satisfy demand after accounting for non-OPEC supply) declining in both these years.
In the US, crude production continues to break records. Output (weekly) was at 13.5 mb/d in the week ending 25 October, according to US Energy Information Administration (EIA) data. The EIA sees output gains of 320 kb/d in 2024 and 420 kb/d in 2025, which would bring average annual production to 13.5 mb/d, cementing the US’ status as the largest oil producer in the world.
Market balance
Abundant supplies and softer demand to weigh on prices in the short-term. According to the IEA, amid softer oil demand and increasing oil supplies, both from OPEC+ and outside the group, the global oil market balance is expected to flip from a modest deficit in 2024 of about 0.3 mb/d on average to a surplus of over 1 mb/d in 2025. The IEA maintains that the market will remain in surplus irrespective of OPEC+ rolling over or unwinding their supply cuts, implying that only further production cuts by the group or better-than-expected economic growth, primarily from China and the no-OECD, could have a material impact on balances and by extension oil prices.
The improvement in China’s growth trajectory is an upside risk that should not be discounted, especially if the authorities pursue with conviction further and more sweeping stimulus pressures. Geopolitical risk and the incoming Trump administration’s policies towards the US energy sector and Iran could also factor but these may have opposite effects on the oil market going forward. Overall, taking a fundamentals-based approach, oil prices could trend soft, averaging $70/bbl in 2025.