Brent oil’s ability to hold above $70 reflects resilience in the face of demand-side challenges, Bloomberg said.
The positive signals from China’s stimulus measures and the US plan to replenish reserves have injected some optimism into the market. But uncertainties surrounding a potential US recession, China’s economic slowdown, and supply dynamics continue to cast a shadow.
Implied volatility for Brent crude options has been on the rise. This suggests potential turbulence and limited price gains ahead.
The downward shift in Brent’s forward price curve relative to six months ago also signals growing bearishness regarding the medium-term supply-demand dynamics of oil. The IEA said that with global oil production capacity still growing, markets will remain “adequately supplied” through to 2028, it said in its latest report.
Brent declined about 15% since mid-April, primarily driven by concerns over the demand outlook and resilient oil exports from Russia, despite Saudi Arabia’s pledged output cuts. But it has also held above $70 a barrel throughout the turbulence, indicating that is a key support level.
New IEA medium-term report sees oil use for transport going into decline after 2026, but overall consumption is expected to be supported by strong petrochemicals demand. Growth in the world’s demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies, according to a new IEA report.
The Oil 2023 medium-term market report forecasts that based on current government policies and market trends, global oil demand will rise by 6% between 2022 and 2028 to reach 105.7 million barrels per day (mb/d) – supported by robust demand from the petrochemical and aviation sectors. Despite this cumulative increase, annual demand growth is expected to shrivel from 2.4 mb/d this year to just 0.4 mb/d in 2028, putting a peak in demand in sight. In particular, the use of oil for transport fuels is set to go into decline after 2026 as the expansion of electric vehicles, the growth of biofuels and improving fuel economy reduce consumption.
“The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency and other technologies advance,” said IEA Executive Director Fatih Birol. “Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition.”
Global oil markets could tighten significantly in the coming months, as production cuts by the OPEC+ alliance temper an upswing in global oil supplies. However, the multifaceted strains on markets look set to ease in the following years, according to the new report.
China was the last major economy to lift its stringent Covid-19 restrictions at the end of 2022, leading to a post-pandemic oil demand rebound in the first half of 2023. But demand growth in China is forecast to slows markedly from 2024 onwards. Nevertheless, burgeoning petrochemical demand and strong consumption growth in emerging and developing economies will more than offset a contraction in advanced economies.
Global upstream investments in oil and gas exploration, extraction and production are on course to reach their highest levels since 2015, growing 11% year-on-year to USD 528 billion in 2023. While the impact of higher spending will be partly offset by cost inflation, this level of investment, if sustained, would be adequate to meet forecast demand in the period covered by the report. However, it exceeds the amount that would be needed in a world that gets on track for net zero emissions.
The report’s projections assume major oil producers maintain their plans to build up capacity even as demand growth slows. This is expected to result in a spare capacity cushion of at least 3.8 mb/d, concentrated in the Middle East. The report nonetheless notes a number of factors that could affect market balances over the medium term – including uncertain global economic trends, the direction of OPEC+ decisions and China’s refining industry policy.
Oil producing countries outside the OPEC+ alliance dominate plans for increasing global supply capacity in the medium term, with an expected rise of 5.1 mb/d by 2028 led by the United States, Brazil and Guyana. Saudi Arabia, the United Arab Emirates and Iraq lead the plans for capacity building within OPEC+, while African and Asian members are set to struggle with continuing declines, and Russian production falls due to sanctions. This makes for a net capacity gain of 0.8 mb/d from the 23 members in OPEC+ overall over the report’s forecast period.
In the refining sector, the overhang in global capacity has been reduced by waves of closures, conversions to biofuel plants and project delays since the pandemic. This, combined with a sharp drop in Chinese oil product exports and an upheaval of Russian trade flows, resulted in record profits for the industry last year. While the amount of net refinery capacity additions by 2028 is expected to outpace demand growth for refined products, diverging trends among products means that a repeat of the 2022 tightness in middle distillates cannot be ruled out.