A ‘Hot’ Summer for Oil?

Apr 5, 2024

Oil demand has taken an unexpected upturn in 2024, driven by strong aviation and bunker fuel needs. The podcast explores how disruptions like Suez Canal issues and seasonal weather could push Brent crude prices to $90 per barrel this summer. As non-OPEC supply continues to expand, the balance with OPEC becomes more critical. Interesting insights also highlight the historical caution required during similar market conditions, making this a pivotal moment for oil prices.

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INSIGHT

Initial 2024 Oil Market Outlook

Initially, the 2024 oil market outlook appeared unexciting.
Slowing demand growth and strong non-OPEC supply suggested OPEC's role would diminish, impacting its market share and spare capacity.

INSIGHT

Tightening Oil Market

By early February, the oil market tightened due to higher demand and weaker non-OPEC supply.
Increased jet and bunker fuel demand, along with US production setbacks, contributed to this shift.

INSIGHT

Brent Crude Oil Price Forecast

The oil market's fundamentals were strong enough to push Brent crude oil to $90 per barrel over the summer.
A seasonal demand surge and geopolitical risks could further drive prices up to $95.

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Oil demand has been higher than expected so far in 2024. Our Global Commodities Strategist explains what could drive oil to $95 per barrel by summer.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss recent developments in the oil market. It is Friday, April the 5th at 4 PM in London.

At the start of the year, the outlook for the oil market looked somewhat unexciting. With the recovery from COVID largely behind us, growth in oil demand was slowing down. At the same time, supply from countries outside of OPEC (Organization for Petroleum Exporting Countries) had been growing strongly and we expected that this would continue in 2024. In fact, at the start of the year it looked likely that growth in non-OPEC supply would meet, or even exceed, all growth in global demand. When that occurs, room in the oil market for OPEC oil is static at best, which in turn means OPEC needs to keep restraining production to keep the balance in the market. Even if it does that, it results in a decline in market share and a build-up of spare capacity. History has often warned against such periods.

Still, by early February, the oil market started to look tighter than initially expected. Demand started to surprise positively – partly in jet fuel, as aviation was stronger than expected; partly in bunker fuel as the Suez Canal issues meant that ships needed to take longer routes; and partly in oil as petrochemical feedstock, as the global expansion of steam cracker capacity continues. At the same time, production in several non-OPEC countries had a weak start of the year, particularly in the United States where exceptionally cold weather in the middle of January caused widespread freeze offs at oil wells, putting stronger demand and weaker supply together, and the inventory builds that we expected in the early part of the year did not materialise.

By mid-February, we could argue that the oil market looked balanced this year, rather than modestly oversupplied; and by early March, we were able to forecast that oil market fundamentals were strong enough to drive Brent crude oil to $90 a barrel over the summer.

Since then, Brent has honed in on that $90 mark quicker than expected. Over the last week or so, the oil market has shown a powerful rally that has the hallmarks of simply tightening fundamentals but also with some geopolitical risk premium creeping back into the price. For now, our base-case forecast for the summer is still for Brent to trade around $90 per barrel as that is where we currently see fundamental support.

However, the oil market typically enjoys a powerful seasonal demand tailwind over the summer. And that still lies ahead. And, geopolitical risk is still elevated, for which oil can be a useful diversifier. With those factors, our $95 bull case can also come into play.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.