Oil Demand Balance More Bullish Than 2023

• Commodity analysts at Standard Chartered have reported that silver and distillates are the only commodities whose investor positioning has changed significantly from a year ago.
• Standard Chartered: oil could be undervalued by at least $10 per barrel.
• Supply and demand balances are significantly more bullish compared to a year ago, when an outsized January surplus of 3.5 mb/d led to a large 1.6 mb/d Q1-2023 surplus.

Last year proved to be another disappointing year for the majority of commodities with everything from oil and gas to grains and base metals recording large declines. Unfortunately for the bulls, 2024 could end up serving up more of the same, if early market sentiment is any indication. Whereas the Bloomberg Commodities Index (BCOM), a popular benchmark tracked by 23 exchange-traded contracts on physical commodities, is essentially flat in the new year, market sentiment closely echoes the start of 2023, signaling trouble ahead. 

At the start of 2023, traders and money managers were bullish on gasoline, gold and platinum; neutral on copper but very bearish on crude oil and palladium. They were [mostly] right: Energy commodities recorded deep losses across the board with gasoline, heating oil, ethanol, refining spreads and coal all recording double-digit losses. Meanwhile, natural gas futures were cut by nearly half thanks in large part to supply outpacing demand; gold posted double-digit gains while palladium declined nearly 40%.

Commodity analysts at Standard Chartered have reported that silver and distillates are the only commodities whose investor positioning has changed significantly from a year ago; positioning in crude oil and metals is strikingly similar to year-ago levels while sentiment on other commodities have only changed slightly. According to StanChart, demand pessimism is once again dominating, along with fears that oil market surpluses will be larger in 2024 than they were in 2023. The major difference is that traders expect the U.S. and Europe to be the main sources of demand weakness in the current year and not China as was the case in 2023. Related: New Protests Threaten to Take Key Libyan Refinery Offline

The analysts, however, have noted there are two important differences this time around that makes them believe oil prices could be undervalued by at least $10 per barrel. 

First off, supply and demand balances are significantly more bullish compared to a year ago, when an outsized January surplus of 3.5 mb/d led to a large 1.6 mb/d Q1-2023 surplus. StanChart has predicted that the January 2024 surplus will clock in at a more normal seasonal level of 1.5 mb/d, with deficits in February and March offsetting much of the January surplus, leading to a counter-seasonal Q1-2024 deficit of just 0.3 mb/d. 

The second key difference is that the markets are underpricing the risk of the geopolitical background in the Middle East, with potential downside to both Iranian and Iraqi oil exports understated.

Robust demand growth

Not only has StanChart predicted a much smaller global oil surplus in the early part of the year but sees demand growth remaining at elevated levels. Indeed, StanChart has forecast that global oil demand growth in 2024 and 2025 will remain above the longer-term average. The experts have predicted that oil demand growth in 2024 will clock in at a robust 1.54 mb/d before slowing down slightly to 1.41 mb/d in 2025. Stanchart says that slowing non-OPEC supply, including from the U.S., and strong demand will support prices at higher levels.

China is expected to remain the main source of demand growth, with demand expected to increase by 553,000 b/d in the current year and 373,000 in 2025. StanChart sees India’s demand growth coming in at 329 kb/d in 2014 and 373 kb/d in 2025. 

Many analysts have, however, predicted that the days of China’s oil hegemony are numbered with India expected to become the main driver of oil demand growth in the coming years thanks in large part to a rapidly-expanding population. China’s rapid adoption of electric vehicles also does not bode well for the country’s oil industry.

“India was always going to exceed China in a matter of time in terms of being the global demand growth driver, mainly due to demographic factors like population growth,” Parsley Ong, the head of Asia energy and chemicals research at JPMorgan Chase & Co. in Hong Kong, has told Bloomberg.

Just like last year, the current year is set to set new records in the oil markets. Stan Chart has predicted that global monthly demand will eclipse 104 mb/d for the first time ever in August 2024 and hit 105 mb/d in August 2025. Non-OPEC demand growth will outstrip supply growth in both years, leading to an increase of 520 kb/d in the call on OPEC crude in 2024 and 880 kb/d in 2025. Call on OPEC is a term used to describe the estimated oil production volume required of OPEC countries to balance the global supply and demand for crude.

StanChart has predicted that U.S crude oil supply will continue growing in 2024, but at a slower clip. U.S. oil production growth is expected to slow down from 1.009 mb/d in 2023 to 464 kb/d in 2024 and only 137 kb/d in 2025. However, StanChart has acknowledged that current drilling and capex plans by U.S. producers could see growth increase by a bigger margin than its forecasts.

StanChart's predictions are quite similar to the EIA’s which also expects little incremental crude oil supply in 2024. EIA estimates that U.S. crude output will not hit 13.3 mb/d until December 2024 after finishing 2023 at 13.2 mb/d.

By Alex Kimani for Oilprice.com

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