Oil demand has been higher than expected so far in 2024. Our Global Commodities Strategist explains what could drive oil to $95 per barrel by summer.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss recent developments in the oil market. It is Friday, April the 5th at 4 PM in London.
At the start of the year, the outlook for the oil market looked somewhat unexciting. With the recovery from COVID largely behind us, growth in oil demand was slowing down. At the same time, supply from countries outside of OPEC (Organization for Petroleum Exporting Countries) had been growing strongly and we expected that this would continue in 2024. In fact, at the start of the year it looked likely that growth in non-OPEC supply would meet, or even exceed, all growth in global demand. When that occurs, room in the oil market for OPEC oil is static at best, which in turn means OPEC needs to keep restraining production to keep the balance in the market. Even if it does that, it results in a decline in market share and a build-up of spare capacity. History has often warned against such periods.
Still, by early February, the oil market started to look tighter than initially expected. Demand started to surprise positively – partly in jet fuel, as aviation was stronger than expected; partly in bunker fuel as the Suez Canal issues meant that ships needed to take longer routes; and partly in oil as petrochemical feedstock, as the global expansion of steam cracker capacity continues. At the same time, production in several non-OPEC countries had a weak start of the year, particularly in the United States where exceptionally cold weather in the middle of January caused widespread freeze offs at oil wells, putting stronger demand and weaker supply together, and the inventory builds that we expected in the early part of the year did not materialise.
By mid-February, we could argue that the oil market looked balanced this year, rather than modestly oversupplied; and by early March, we were able to forecast that oil market fundamentals were strong enough to drive Brent crude oil to $90 a barrel over the summer.
Since then, Brent has honed in on that $90 mark quicker than expected. Over the last week or so, the oil market has shown a powerful rally that has the hallmarks of simply tightening fundamentals but also with some geopolitical risk premium creeping back into the price. For now, our base-case forecast for the summer is still for Brent to trade around $90 per barrel as that is where we currently see fundamental support.
However, the oil market typically enjoys a powerful seasonal demand tailwind over the summer. And that still lies ahead. And, geopolitical risk is still elevated, for which oil can be a useful diversifier. With those factors, our $95 bull case can also come into play.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
Seth Carpenter: The ECB, The Fed and Oil Prices
Thematic Research: How AI Can Transform Travel Booking
Martijn Rats: Why Energy Sector is Attractive Once Again
U.S Housing: The Impact of Raising Rates
Vishy Tirupattur: U.S. and China on Divergent Paths
Global Economy: Fall Outlook for Rates and the Economy
Andrew Sheets: A Murky Forecast for Equities and High-Yield Bonds
Stephen Byrd: Watch Out for El Niño
Michael Zezas: Congressional Return Raises Questions for Markets
Mike Wilson: Are Stocks Beginning to Question Economic Resiliency?
U.S. Consumer: How U.S. Consumers Are Shopping to Go Back to School
Daniel Blake: Japan’s Surge in GDP Growth
Energy: Are Europe’s Clean Energy Goals Realistic?
Seth Carpenter: The Global Implications of China’s Deflation
Vishy Tirupattur: Banking Regulations Could Reduce Available Credit
Andrew Sheets: Is the Fed Done Raising Rates?
Special: Access & Opportunity Podcast
Michael Zezas: What to Expect from Presidential Debates
Special Encore: Vishy Tirupattur: Corporate Credit Risks Remain
Special Encore: Global Autos: Are China’s Electric Vehicles Reshaping the Market?
Create your
podcast in
minutes
It is Free
The emPOWERed Half Hour
Now, What’s Next?
Access and Opportunity
At Scale: A Sustainability Podcast