“Unfortunately there is nothing called rocket science when it comes to forecasting” according to Saudi Arabia’s Energy Minister (and OPEC+ Chairman) last week, as the press conference video shows.
HRH Prince Abdulaziz bin Salman Al-Saud argued that OPEC+ has no special insight into the outlook for “the world economy, interest rates, growth – the jury is still out“. But he added that OPEC+ believes the market is “very pessimistic on demand, very optimistic on supply. Check how much is coming from non-OPEC+ supply countries in the last 5 months.”
WHAT IS HAPPENING TO OIL DEMAND?
Global oil demand growth projections for 2024
OPEC+’s problem is that its forecasts have been very optimistic on 2024 oil demand growth. As the Reuters chart shows from March:
- Oil market analysts have been downbeat, expecting a 1.27mbd increase
- The International Energy Agency and US Energy Information Agency were at 1.3 mbd and 1.43 mbd
- But OPEC was still maintaining its July 2023 view that demand would rise 2.25 mbd. arguing:
“While some downside risks persist, a continuation of the expected momentum from the beginning of the year could result in additional upside potential for global economic growth in 2024. The 2024 and 2025 growth trajectories of India, China, as well as the United States, could exceed current expectations.”
This is the largest gap between the forecasts since 2008. And since March, the latest IEA forecast has actually reduced its forecast to 1.1 mbd – half of OPEC’s current number.
WHAT IS HAPPENING TO SUPPLY?
Several OPEC+ members pump well above quotas in April
OPEC+’s problem is that it has to keep all its members happy. And this isn’t easy, as S&P data for April shows:
- Initial data for May suggests OPEC+ produced 26.63 mbd – 145 kbpd more than April
- Russia wants to pump as much as possible to finance its increasingly expensive Ukraine invasion
- Iraq and Kazakhstan have been over their quota for some time, and are proving slow to cut back
- The UAE has long argued for a higher quota and gained a 300 kpbd rise at last week’s meeting
The US election is another factor on OPEC’s mind. Last year saw the Senate Judiciary Committee revive the NOPEC Bill, which would remove OPEC’s anti-trust exemption:
- This would allow OPEC members to be sued for price collusion
- And 23 Senators recently urged the Dept of Justice to investigate price collusion between OPEC and the US oil industry
- The DoJ has already acted against Pioneer’s CEO, banning him from joining ExxonMobil’s board
THE OIL MARKET IS CLEARLY SEEKING DIRECTION
BRENT CRUDE OIL, $/BBL, 2004 – 2024
Oil prices confirm the current lack of direction as the chart shows:
- Prices had risen to $120/bbl from their 2020 Covid lows by May 2022
- A year later, they had fallen back to $75/bbl, and have since been in a $75 – $95/bbl range
- OPEC+ had hoped its original quota cutbacks would push prices to $100/bbl
- But instead, they have simply encouraged non-OPEC supply to increase
- US output has recovered from its 9.7 mbd low in 2020 to a record 13.3mbd recently
THE REMEDY FOR HIGH OIL PRICES IS … HIGH PRICES
Oil and financial markets began 2024 expecting up to 6 US interest rate cuts in 2024. And so oil prices rose 23% till early April, when reality began to dawn.
Now GDP forecasts are being revised down.
And at the same time, China’s forecasts for Electric Vehicle sales are being revised up. EVs were 50% of all car sales in early April and will probably average 45% this year.
Unsurprisingly, Sinopec is now forecasting China’s oil demand will peak by 2027 – 3 years earlier than its December forecast.
OPEC would have been better advised to keep prices low to reduce non-OPEC supply. Instead, it is likely to face some difficult pricing decisions later in the year, if global growth continues to slow.