Oil markets have been on a rollercoaster ride in recent weeks, displaying levels of volatility that could rival the Olympics. Benchmark crude oil prices experienced a sharp decline in July and early August due to unexpected economic data that threw the market off balance. Concerns about the global economy resurfaced as Japan raised interest rates, leading to a reversal in yen carry trades. Additionally, China’s economic outlook deteriorated, and US hiring slowed in July. Despite these challenges, persistent geopolitical tensions in the Middle East and some positive macroeconomic data helped support oil futures, leading to a rebound in prices in the second week of August. Currently, ICE Brent futures are trading around $80/bbl, down more than $6/bbl since the beginning of July.
One of the factors influencing oil markets is the ongoing OPEC+ cuts, which are tightening physical markets and causing North Sea Dated to trade at a $2/bbl premium against the front-month ICE contract. This, along with geopolitical tensions, has contributed to the recent price fluctuations in the oil market. Looking ahead, our outlook for global oil demand remains relatively unchanged, with growth projected to be slightly less than 1 mb/d in both 2024 and 2025. However, there is a noticeable shift in drivers of oil demand, with Chinese oil demand contracting for the third consecutive month in June due to a slump in industrial inputs. On the other hand, demand in advanced economies, particularly US gasoline consumption, has shown signs of strength in recent months.
Despite the slowdown in Chinese oil demand growth, OPEC+ has not yet decided to reverse its plan to gradually unwind voluntary production cuts starting in the fourth quarter. The Joint Ministerial Monitoring Committee (JMMC) of OPEC+ has indicated that they may reconsider their decision depending on market conditions. Current balances suggest that even with the production cuts in place, global inventories could build by an average of 860 kb/d next year as non-OPEC+ supply is expected to increase by around 1.5 mb/d in both 2024 and 2025, surpassing expected demand growth.
In the midst of peak summer demand, supply is struggling to keep pace, leading to a market deficit. As a result, global inventories have been impacted, with June seeing a decrease of 26.2 mb in oil inventories. Crude oil stocks dropped by 40.9 mb, while oil products rose by 14.8 mb, supported by large builds in US LPG. Preliminary data for July suggests a continuation of this trend, with total stocks declining once again. This dynamic is putting pressure on refinery margins, potentially signaling a shift in refinery activity in the coming months.
Overall, the competition in the oil markets is expected to continue even after the recent volatility. With various factors at play, including geopolitical tensions, OPEC+ decisions, and supply-demand dynamics, the oil market remains a complex and ever-changing landscape. Investors and industry players will need to closely monitor these developments to navigate the uncertainties and opportunities in the oil market.