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Oil prices have been strengthening over the past few weeks. The trend is not of particularly noticeable proportions, with Brent still stuck in the low $80s and West Texas Intermediate hovering around $80 per barrel.
This could change later in the year, however, Morgan Stanley’s global oil strategist Martijn Rats has predicted. In fact, prices could rise so sharply that they might take some by surprise.
“There is a view in the market that the non-OPEC producers can meet all of the demand growth this year and therefore there isn’t much incremental room for OPEC oil and that means you rely on continued OPEC cuts,” Rats told CNBC this week.
However, actual reality has proven to be a bit different from that perception, the analyst said, telling CNBC that “On the supply side, we’re seeing a slowdown in U.S. shale, we’ve seen a wobbly start in Brazil [and] we’ve seen a wobbly start in Canada. We expected inventories to build, but year-to-date, they are kind of flat. If in the first quarter, inventories [are] flat then they can draw possibly quite significantly during the summer period.”
Interestingly, the Energy Information Administration this week revised upwards its forecast for U.S. oil production growth this year, but adjusted its global production outlook downwards. The EIA also revised its oil price forecast on that basis, now expecting Brent and WTI to end the year on a higher note than previously expected.
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“The lower growth contributes to significant global oil inventory declines in our forecast for the second quarter of 2024 (2Q24),” the EIA said in its latest Short-Term Energy Outlook, suggesting the market tightening that Morgan Stanley’s Rats anticipates could come sooner rather than later.
This would certainly surprise many who see the oil market as well supplied, not least because of a slew of forecasts pointing to weaker demand from China—the biggest driver of oil demand in the world. This perception of demand weakness contributed to oil prices’ range-bound movement for much of last year despite the physical market actually showing record demand from the world’s largest importer of the commodity in absolute terms.
Worries about the global economy also served to fuel this perception that oil prices have limited upward potential. This worry has had a more solid grounding with a lot of countries struggling with their post-pandemic lockdown recovery and others, notably in Europe, reeling from an energy crunch that began in late 2021 and really got a boost in 2022.
This attitude, however, may be changing, too. OPEC, in its latest oil market report, sounded a note of optimism on economic growth, revising its forecast for this year by 0.1% to 2.8%. The IMF was even more optimistic last month when it revised its own global GDP growth for this year to 3.1%, a 0.2% upward revision from its previous projection.
This is why OPEC reiterated its expectation of strong oil demand growth this year, at over 2.2 million barrels daily, even as the International Energy Agency keeps lowering its own demand projections.
Indeed, in an environment where the dominant perception is of first, weakening Chinese demand growth; second, Europe in economic crisis; and three, energy transition, it is easy to assume that oil prices will remain weak. This assumption, like many others, may turn out to be quite wrong, serving a nasty surprise to those betting money on it.
Right now, prices are on the rise following a string of drone attacks by Ukraine on Russian refineries, sparking concern about fuel supply security. They also got a boost from another round of fuel inventory draws in the United States, which suggests strengthening demand. The temporary boost could extend as we near the start of driving season, and EV sales appear to be growing more softly than they were last year. It could extend and strengthen to an extent that might result in something of a shock.
