ShareKUWAIT: Oil prices increased for the fourth month in a row in September, driven by tightening oil market fundamentals amid still resilient economic activity. Brent crude closed the month up at $95.3/bbl (+9.7 percent m/m; +10.9 percent ytd), also posting its best quarterly performance (+27 percent q/q) since Q1 2022 in the process. Local crude marker Kuwait Export Crude (KEC) rose to $97.9/bbl (+9.1 percent m/m; +19.3 percent ytd), maintaining its premium over Brent in reflection of the relatively tighter medium sour crude landscape post-Saudi and Russian supply cuts.
Moving into October, however, and oil’s sharp rise ran into resistance, with the price of Brent falling to the mid-80s. The impetus appeared to be a mix of profit-taking by speculators and oil demand concerns related to key central banks including the US Fed keeping interest rates higher for longer. The consequent strengthening of the US dollar—up 1.7 percent over the last two weeks on a trade-weighted basis—has also been a negative influence on the dollar-denominated oil price.
That said, the attack by Hamas on Israel on October 7 has seen oil’s geopolitical risk premium resurface: Brent rose more than 4 percent the following day to $88/bbl, recouping some of its early month losses. The bullish sentiment that has driven the oil rally is evident in money flows into Brent futures by hedge funds and speculators. Net length, a measure of the difference between the number of contracts betting on oil prices increasing (’longs’) and those betting on prices falling (‘shorts’), spiked to its highest level (265k futures and options contracts) since early March, while the volume of outstanding oil contracts (‘open interest’) continued to rise to near-two-year high levels.
Global oil demand growth has remained fairly robust this year despite the economic dampening effect of tighter central bank monetary policies. Resurgent activity in China and firm OECD economic activity lifted demand to a record 103 mb/d in July, setting it on course to grow by 2.2 mb/d this year, predicts the International Energy Agency’s (IEA). The oil market balance, which switched into a supply deficit in Q2 2023, is estimated to have widened in Q3 to around 1.9 b/d, according to our calculations.
The final quarter of the year should see it marginally narrow to a still hefty 1.5 mb/d. China’s oil consumption data has surprised on the upside in recent months, with Chinese refiners setting a new record with the volume of crude they processed in July (approx. 15.2 mb/d) amid fairly elevated crude imports. For 2024, however, the growth outlook appears less clear-cut, with wide variation among major energy forecasters’ demand growth estimates. While the IEA sees oil demand growth more than halving to 1.0 mb/d, OPEC sees a more bullish gain of 2.2 mb/d. Both acknowledge, however, the potential negative impact on oil demand and macroeconomic activity of persistently high global interest rates.
The IEA also sees oil consumption in the transportation sector especially being further suppressed by increased efficiency gains, electric vehicle penetration and working from home practices. On the supply side, combined data from OPEC secondary sources and S&P Global show aggregate OPEC+ output (excluding quota-exempt countries Iran, Libya and Venezuela) falling by 87 kb/d in August to 35.6 mb/d, the lowest level since July 2021. The decline was due to lower Saudi(-88 kb/d), Angolan (-60 kb/d) and Kazakhstani (-50 kb/d), volumes, partially offset by higher Nigerian output (+98 kb/d).
Russian production fell marginally to 9.4 mb/d (-20 kb/d) in August. It is difficult to reconcile this data with Russia’s supply cut promises, however, as those pertained to exports rather than production. Kuwait’s crude production was flat month-on-month at2.55mb/d, according to secondary source data. It is expected to stay at this level until year-end as per Kuwait’s voluntary cut commitments, but should then rise to 2.68 mb/d in January once the cuts are rolled back (assuming no change in OPEC+ policy).
The increase in crude volumes will be welcomed by the authorities, as they look to utilize more fully the completed 650 kb/d Al-Zour refinery to produce more refined products (fuel oil and gasoil especially) for export to international markets and to supply more crude to the nearly-completed 230 kb/d Al-Duqm refinery in Oman, in which Kuwait holds a 50 percent stake. Kuwait is signed onto supply 65 percent of the refinery’s crude. Outside of the OPEC+ group, US crude production has surged to its highest level since March 2020 at 12.9 mb/d, US Energy Information Administration (EIA) data shows.
This is a gain of 800 kb/d year-to-date—the most since 2019—as high oil prices spur renewed oil major spending and efficiency gains. Indeed, crude output has increased even while the number of actively producing rigs continues to decline. According to Baker Hughes, oil rig counts have declined 18 percent since the start of the year. The EIA has marginally revised up its oil production forecasts for 2024 to 13.16 mb/d.
We expect the tight global oil market fundamentals to persist in the near-term amid continued OPEC+ supply cuts—Saudi and Russia just this week reaffirmed their commitment to extending their voluntary cuts to year-end and the OPEC+ monitoring committee recommended no change in member production quotas—and relatively solid oil consumption. For oil prices, the potential for further upside may be capped, though, by lower seasonal oil demand and the likelihood of some supply increases from both OPEC (Iran and quota-bound members currently producing well below their allowances) and non-OPEC (especially the US and Brazil).
