Since the beginning of this year, the unstable geopolitical situation in the Middle East has supported oil prices, and international oil prices have generally fluctuated and strengthened. Especially in March, OPEC+ extended voluntary additional production cuts, Ukraine frequently attacked Russian refineries, and the International Energy Agency (IEA) and other three major institutions raised their expectations for global oil demand growth, which further boosted oil prices, and international oil prices rose significantly.
Overall, geopolitical factors were the main driving force for the shock of international oil prices in the first quarter. Looking ahead, factors such as OPEC+ production policy, Fed monetary policy, Russia-Ukraine and the Middle East, and the U.S. election may all have an important uncertain impact on the trend of oil prices.
Experts of this issue
Huo Lijun
Petroleum Market Research Institute, China National Petroleum Corporation Economic and Technical Research Institute
The growth momentum of oil demand is insufficient
Oil market fundamentals remained tightly balanced in the first half of the year
From the demand side, the growth momentum of global oil demand is insufficient, but the demand growth in the first quarter of this year exceeded expectations, and the demand in the peak season in the third quarter needs to be verified.
The outlook for the global economy has improved, but growth momentum remains insufficient. This year, global inflation has been steadily declining, the monetary policy of major central banks is about to shift, and the outlook for world economic growth tends to improve, but under the influence of factors such as insufficient demand, sluggish trade, and continued geopolitical tensions, economic growth momentum is still insufficient. Since the beginning of this year, the United Nations and the World Bank have lowered their forecasts for global economic growth this year, and the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have raised them, but overall, most institutions still believe that global GDP growth will be lower than in 2023 this year.
The growth rate of world oil demand slowed, and the demand growth in the first quarter exceeded expectations. Global oil demand has basically completed the post-epidemic recovery and will return to its previous trend growth this year. Under the influence of factors such as slowing economic growth, improving energy efficiency and accelerating the substitution of new energy vehicles, the growth rate of global oil demand will slow down and is expected to increase by 1.3 million barrels per day this year. Global oil demand grew better than expected in the first quarter of this year (seasonal off-season), estimated at about 1.7 million b/d year-on-year, due to an improved U.S. economic outlook, increased demand for chemical oils, and increased demand for shipping fuels due to a large number of tankers circumnavigating the Cape of Good Hope. It is expected that global oil demand will gradually increase in the second quarter, but it will be difficult for the demand side to effectively pull oil prices before the arrival of the third quarter (peak oil demand season), and the demand performance in the summer (peak demand season) has yet to be verified.
From the supply side, OPEC+ production cuts have limited the growth of oil supply, and the increase in production by non-OPEC+ oil producers will still drive the growth of world oil supply.
OPEC+ extended its voluntary production cuts until the end of the second quarter of this year, and its late-stage policy remains uncertain. In February, the combined crude production of the 18 OPEC+ quota-bound producers remained 420,000 b/d above their quotas, largely because the United Arab Emirates, Iraq and Kazakhstan still failed to meet their pledges to cut production, with the three countries overproducing by 310,000 b/d, 250,000 b/d and 120,000 b/d, respectively. At its meeting in early March, OPEC+ announced that it would extend the current voluntary production cuts until the end of the second quarter. Under the long-term strategy of reducing production and maintaining prices, OPEC+'s market share has been continuously eroded by non-OPEC+ oil producers, the implementation effect of production cuts in various countries has been greatly reduced, and the willingness to increase production has also been increasing, which has greatly increased the uncertainty of OPEC+'s follow-up production policy.
Russia's oil production is generally stable, and the increase in US sanctions against Russia has increased the uncertainty of Russian oil exports. In February, Russian crude oil production edged up by 20,000 b/d from the previous month to 9.42 million b/d. Since the second half of last year, Russia's crude oil production has generally remained at the level of 9.4 million to 9.5 million barrels per day. In March, Ukraine launched frequent attacks on Russian refineries, which significantly affected the production of Russian refineries. Russia's energy ministry said that from March 14 to 20, Russian refinery output fell by more than 400,000 barrels per day. With its domestic refining volume declining, Russia may later make good on its crude oil production cut pledge and increase crude oil exports while cutting oil exports. However, the United States has previously increased sanctions against Russia and "blacklisted" Russia's large state-owned shipping company Sovcomflot and its 14 crude oil tankers, which may have a negative impact on Russian crude oil exports.
The pace of U.S. crude oil production increases has slowed, but it remains the most important source of growth on the supply side. Since October last year, the number of oil rigs in use in the United States has remained at a low level of about 500, and the momentum of crude oil producers to increase production is obviously insufficient. U.S. crude oil production peaked at 13.3 million b/d at the end of last year and has not breached that level since, falling back to 13.1 million b/d in recent weeks. Despite the slowdown in production growth, U.S. crude oil has eased supply-side pressures to some extent and will remain the most important source of world oil supply growth this year. The U.S. Energy Information Administration (EIA) expects U.S. crude oil and condensate production to increase by 260,000 b/d and 130,000 b/d year-on-year, respectively, this year.
From the perspective of supply and demand balance, the fundamentals of the world oil market remained tightly balanced in the first half of this year, and the outlook for OPEC+ production policy determines the fundamental outlook for the second half of the year.
OPEC+ voluntary additional production cuts have effectively limited supply growth, and it is estimated that the fundamentals of the world oil market will remain tightly balanced in the first and second quarters of this year. At the same time, the current global oil inventory is still at a low level in recent years, and the basic face is generally supported by oil prices. In the second half of the year, the outlook for OPEC+ production policy is key to influencing the fundamental situation. If OPEC+ increases production slightly in the second half of the year, it is expected that there will be no significant pressure on the fundamentals in the third quarter (peak demand season), but the pressure on oversupply in the market will increase significantly in the fourth quarter. If OPEC+ extends the current production cuts until the end of the year, the world oil market will continue to be undersupplied in the second half of the year, especially in the third quarter, when the market will face a significant supply tightness.
Geopolitical factors have become the main driving force for the upward movement of oil prices
The follow-up trend is uncertain
In terms of finance, the Fed's interest rate hike cycle is over, and interest rate cuts are likely to start in the second half of the year. At its March monetary policy meeting, the Fed kept the target range for the federal funds rate unchanged at 5.25%-5.5%, which remained the highest in 22 years. At present, most market participants expect that the Fed's rate cut window will not open until the second half of the year, and interest rates will remain high for some time. It should also be noted that on 21 March, the SNB announced a 25bp rate cut. Market participants expect that the European Central Bank may cut interest rates before the Fed, which will lead to a passive strengthening of the dollar, which is bearish for oil prices to a certain extent. Oil prices are expected to be boosted by easing liquidity and the expectation of a weaker dollar as the Fed's rate cut becomes a reality in the second half of the year.
On the geopolitical front, the geopolitical situation is complex and volatile, which may still have a larger-than-expected impact on oil prices. Since the beginning of this year, the Palestinian-Israeli conflict and the situation in the Red Sea have continued to support oil prices. On March 25, the UN Security Council voted to adopt a draft resolution calling for an immediate ceasefire in the Palestinian Gaza Strip. But then the Israeli delegation to the Gaza Strip ceasefire talks in Doha, the capital of Qatar, was recalled by the government, which Israel believes has reached a "dead end." This shows that the Palestinian-Israeli conflict has not yet been effectively resolved, and there is still a possibility of further escalation in the later stage. On the Russian side, on the occasion of Russia's March election, Ukraine intensified its attacks on Russian energy facilities. At the same time, the terrorist attack on the Moscow Concert Hall has increased the market's concerns about the escalation of the situation between Russia and Ukraine, and there is great uncertainty about the subsequent evolution of the situation between Russia and Ukraine, which may once again bring major disruptions to the market. In addition, this year is an election year in the United States, and the results of the election near the end of the year may also be an important factor affecting the oil market. The policy orientations of the Democratic Party and the Republican Party in the United States are quite different in energy, finance, trade, and military, especially if Trump is elected, which may have a more adverse impact on the global economy.
Looking ahead, the growth of oil demand is not strong, the supply is still supported by production cuts, geopolitical factors will be the main driving force for the strength of oil prices, and the unstable and uncertain trend of oil prices is still large. The global economic growth momentum is insufficient, the growth rate of oil demand is slowing down, and the demand side has not strongly boosted oil prices, but OPEC+ voluntary additional production cuts have brought important fundamental support to oil prices, and the intensification of the geopolitical situation in Palestine and Israel, the Red Sea, Russia and Ukraine has continued to bring important support to oil prices, which is also the primary reason for the sharp rise in international oil prices since the beginning of this year. In the short term, the geopolitical situation is still an important uncertain factor affecting oil prices, and at the same time, the recent market bullish expectations have generally increased, which may still push international oil prices to new highs under the current state of tight fundamentals.
In the third quarter, it is expected that the Federal Reserve will most likely start to cut interest rates and the arrival of the peak demand season and other factors will continue to be good for oil prices, but the follow-up production policy of OPEC+ will determine whether fundamentals and financial factors can form a joint drive for oil prices. In the fourth quarter, the U.S. election and OPEC+ production policy will become important factors in determining the trend of oil prices, and the market still needs to be wary of the long-term sustainability of OPEC+'s high production cuts after the peak demand season, as well as the risk of a correction in oil prices brought by the uncertainty of the global political and economic outlook.
Further reading:
All sides look at oil prices
Oil Price Network Michael Cohen:
Amid the growing bullishness of the oil market, there is a real possibility that the price of Brent crude oil futures could rise to $90 per barrel. While oil demand uncertainty remains, geopolitical risks, a weaker dollar and OPEC+ production cuts have pushed oil prices higher.
Bloomberg:
As OPEC+ ministers are about to assess the global oil market, they will see plenty of evidence that production cuts are working. After a sluggish start to the year, crude oil prices are showing signs of recovery as oil supplies from Saudi Arabia and its allies dwindle and demand is resilient.
Brent crude futures have risen about 11% so far this year and have recently stabilized above $85 a barrel. While this could undermine recent efforts to reduce inflation and hit central banks and consumers, the rally has supported important revenues for Saudi Arabia and its partners.
Standard Chartered Bank:
Global oil demand is expected to hit an all-time high of 103.01 million b/d in May, a new record of 103.62 million b/d in June, and even higher in August to 104.31 million b/d. The tightening of the oil market will continue to drive oil prices higher, with Brent crude futures expected to average $94 per barrel in the second quarter of this year.
Supply growth is likely to remain constrained, with U.S. crude production not expected to grow significantly above its all-time high of 13.319 million b/d in November 2023.
外汇资讯网站FXEmpire
Market analyst Vladimir Zernov:
As traders focus on the recent improvement in the oil supply and demand situation, international oil prices have gained upward momentum. OPEC+ is still holding on to production cuts, while oil demand from China and the United States is expected to grow.
Price Futures Group, USA
Senior Market Analyst Phil Flynn:
Claims about a recession and OPEC's inability to implement production cuts have been proven wrong. The pessimism about oil prices in the market at the start of the year looks to be dissipating as the reality of supply and demand does not align with the pessimistic narrative. While geopolitical factors have not yet led to major disruptions in oil supplies, they have undoubtedly increased transportation costs and procurement difficulties.
This article was originally published on the 7th edition of China Petroleum News on April 2, 2024, with the original title of "International Oil Prices Fluctuate and Rise, and the Follow-up Uncertainty is Greater"
Curator: Li Xiaosong, Wei Xiaoxi
Author: Huo Lijun Li Xiaosong
Editor: Yang Ziyi
Editor-in-charge: He Li
Review: Li Xiangyang
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