Robust Non-OPEC Oil Supply Might Cap Oil Prices

Last year, global oil demand grew at a blistering pace with 2023 consumption exceeding the previous year's by more than 2 million barrels per day. A number of energy agencies have provided demand growth forecasts for the current year, and the consensus is that global oil demand will see another uptick in 2024. 

The Paris-based International Energy Agency (IEA) typically leans to the bearish side when it comes to oil demand and oil price predictions; however, the agency has raised its 2024 oil demand growth estimate from 850 kb/d in May 2023 to 1.2 mb/d currently. 

The U.S. Energy Information Administration (EIA) tends to be more bullish on these matters. The EIA has trimmed its 2024 demand growth forecast from the 1.7 mb/d it had predicted back in January 2023 to 1.35 mb/d currently while Standard Chartered's has remained mostly flat at 1.5 mb/d.

And, yet another energy watchdog has weighed in: Energy Intelligence has predicted that global demand in 2024 will clock in at a modest 1.1 mb/d, a growth clip typical of the pre-Covid era. According to Energy Intel, non-Opec-plus supply growth of 1.5 million b/d (crude 1 million b/d) will be enough to offset demand growth even if it surprises to the upside in the 1.5 million-2 million b/d range. This, in effect, means that OPEC will have little room to unwind its production cuts if these numbers turn out to be in the ballpark. 

Further, Energy Intel says limited pent-up demand, a weaker economy, adequate spare production capacity and large Chinese inventories will all serve to keep a cap on prices.  Related: Oil Prices Drop, Recover on Gaza War Ceasefire Proposal Rumors

Energy Intel's view on OPEC production contradicts StanChart's, which has predicted an average 2024 call on OPEC crude oil of 29.3 mb/d, 1.4 mb/d higher than 2023 output, leaving scope for voluntary cuts to be phased out quickly. Call on OPEC is the difference between global oil demand and oil supply by non-OPEC members. If OPEC is unable to meet this call, a deficit ensues while exceeding it leads to oversupplied markets. 

OPEC belongs to the bull camp, too. The global oil organization has predicted that global oil demand growth will far outpace non-OPEC supply growth over the next two years. OPEC has predicted that global demand growth will clock in at 2.25 million b/d in 2024 and 1.8 million b/d in 2025 as the Chinese economy grows stronger, well above non-OPEC supply growth at 1.34 million b/d in 2024 and 1.27 million b/d in 2025, on the back of surging production by the U.S., Canada, Brazil and Guyana.

Source: Energy Intelligence

Geopolitical Risks

Energy Intel has, however, acknowledged that any major supply disruption or further

elevation of Mideast risk could still present upside potential. 

It's a view shared by Standard Chartered which has argued that the markets are heavily discounting ongoing geopolitical risks. The commodity analysts have noted that the markets only issued a muted response to the recent drone attack that killed three and wounded more than 40 U.S. servicemen at a military base in Jordan near the Syrian border. According to StanChart, the markets appear to be betting that the U.S. will only issue a light response to the attack that likely will be limited to Iraq and Syria.

But StanChart says there's a big probability that we will see a significant change in the policy dynamic between the U.S. and Iran, with Iran's surging oil production likely to be in the crosshairs.

Last year, we reported that the Biden administration had been increasingly cozying up to Iran as the U.S. and its allies hoped to strike a new nuclear deal with Tehran following the collapse of the Joint Comprehensive Plan of Action (JCPOA) deal of 2015 under former President Trump. Iranian oil production crashed from 3.8 million barrels per day in early 2018 to less than 2 mb/d in late 2020 following the imposition of severe sanctions; however, production has once again surged to 3.2 mb/d under Biden.

Since the beginning of the Middle East conflict, experts have debated whether the U.S. would let the status quo with Iran remain or whether the West would attempt to roll the clock back to early 2022 or even to late 2020. The latest attacks on U.S. troops has left little doubt as to the direction Washington is likely to take: U.S. Secretary of State Antony Blinken has said the West's response will be"multi-levelled, come in stages, and be sustained over time".

By Alex Kimani for Oilprice.com

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