- Chinese oil demand on one side and conflict in the Middle East threatening supply on the other.
- The influence of slower demand appears to outweigh geopolitical tensions; however, oil markets could face further pressure into 2025 as a wave of new oil supply hits the market.
News around the crude market has recently been dominated by headlines about weak Chinese oil demand on one side and conflict in the Middle East threatening supply on the other. For now, the influence of slower demand appears to outweigh geopolitical tensions; however, oil markets could face further pressure into 2025 as a wave of new oil supply hits the market, reports Gibson.
OPEC+ recently cut demand expectations to 2.11 mbd of growth in 2024. Even though we are well into the second half of the year this demand has not yet materialised, which may require further downward revisions to their projections and casts doubt on their 2025 forecast for a demand increase of 1.78 mbd. The IEA is more conservative and expects a moderate 0.97 mbd of demand growth in 2024, followed by 0.95 mbd in 2025.
These numbers are in stark contrast to the supply outlook. Both North American and Latin American supply growth will continue into 2025, with the US and Canada alone contributing 740 kbd of additional supply. In Latin America, both Brazilian and Guyanese crude production has been going from strength to strength, and in 2025 they will add 290 kbd and 100 kbd, respectively. The additions from non-OPEC+ countries are expected to come to 1.5 mbd, with OPEC+ sources adding 400 kbd, if voluntary OPEC+ supply cuts stay in place. In total, the IEA expects an additional 1.9 mbd of oil supply to come online next year. The current OPEC+ position is to ease supply curbs starting from October by 180 kbd, increased to 227 kbd in January, with the entire 2.2 mbd cut from January this year to be shelved by November 2025. Thus, total supply growth could be much higher.
Demand growth expected
Demand growth is mostly expected in Asia, which means most of the additional supply is headed for long haul export. However, of the 0.95 mbd in extra demand the IEA predicts in 2025, 320 kbd are expected to come from China, and it remains unclear whether this will materialise. The IEA anticipated 500 kbd of Chinese demand growth in 2024 earlier in the year but revised this down to 300 kbd in their latest report. According to Bloomberg data Chinese crude imports in H1 2024 were down 3% compared to the same period in the previous year, and 7% of this total, or 800 kbd, were used to fill up strategic stockpiles. This may indicate that actual demand estimates may trend lower still, unless some form of stimulus is introduced. One of the biggest drivers behind lacklustre demand in China is the uptake of new energy vehicles comprised of LNG and EVs, for which sales reached over 50% of retail sales for the first time in July 2024.
Overall, the IEA predicts that markets will be oversupplied by at circa 850 kbd in 2025. Long life projects for most producers mean that they will be unable to cut production to stabilise prices, and so far only OPEC+ have shown themselves willing to play this role. US shale producers are capable of short-term supply cuts, but at what price point shale producers would curtail output remains unclear. OPEC+ have already hinted that if demand remains weak, they may keep the production cuts in place for longer to stabilise the market.
Iraq, Kazakhstan, and Russia have been exceeding their quotas and have consequently agreed to further supply constraints to stick to production targets. Further lack of compliance may lead to strife within the group, who are holding back a total of 7.5 mbd of spare production capacity. Barring larger than expected growth in demand, and if OPEC+ members are unable to keep supply constrained, the market seems destined to be oversupplied in 2025. This could prompt an increase in storage demand, perhaps on tankers if the situation were to become extreme.
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Source: Gibson
