Uncertainty Surrounds Oil Demand Growth In 2024

1. 2024 Demand Outlook Remains Murky as Forecasters Contradict One Another

- As political narratives continue to shape the oil market's sentiment about next year, two leading international organizations - the IEA and OPEC - have been holding widely different views about 2024 growth.

- In its most recent oil market report, OPEC reiterated its expectation of world oil demand growing by 2.25 million b/d in 2024, only slightly lower than this year's 2.44 million b/d, whilst the IEA expects a mere 880,000 b/d.

- A Reuters survey of 40 economists and analysts found that the average Brent prediction for 2024 came in at $86.62 per barrel, only a slight uptick compared to this year's $84-85 per barrel range.

- China, India, and Brazil are expected to be the main drivers of crude demand growth next year, whilst the United States is set for its first year-on-year demand decline in the post-COVID period, falling to 19.9 million b/d.

2. US Natural Gas Output Defies Lukewarm Drilling Activity

- US natural gas production has been robust in September-October despite a significant slowdown in gas-focused drilling, averaging 101.7 BCf per day in October, only a tad below the 2023 monthly average high of 102 BCf/d.

- Injections in natural gas storage have been trending above average in October, with the latest EIA data putting gas stocks at 3,779 BCf (up 79 Bcf since the previous week ending October 20 and almost 6% higher than the 5-year average).

- Analysts expect declining rig activity and high LNG feedgas demand to cut into the gas storage surplus, currently around 5% above the 5-year average, and provide pricing upside to Henry Hub futures early next year.

- S&P Global expects US natural gas production to shrug off long-term concerns about low drilling activity and rise incrementally, staying above the 102 BCf per day mark through mid-2024.

3. M&A Megadeals Reduce Liquidity in Hedging Markets

- The takeover of Hess and Pioneer by Chevron and ExxonMobil, respectively, will prompt a steady decline in crude oil hedging as both companies have been at the forefront of US shale hedging.

- In 2023, a total of 756,000 b/d of US shale production has been hedged, of which Hess Energy accounts for roughly 130,000 b/d, the second largest volume with only Diamondback Energy surpassing that level (153,000 b/d).

- Pioneer has locked in prices for only 3,000 b/d this year, however as recently as in 2021 it was a leading crude hedger with some 175,000 b/d covered.

- As oil majors with downstream assets tend to rely on their downstream and retail instead of hedging, lower hedging volumes should decrease depth in the back end of a futures curve and keep months further out flattened in case of a price rally.

4. Renewables Firms Enter Survival Mode as Competition Sours

- Renewables firms are facing arguably the most difficult financial outlook in years despite the still-robust proliferation of solar and wind technologies, with the IEA expecting 500 GW of non-fossil generation capacity added this year.

- The world's largest wind turbine maker Xinjiang Goldwind Science and Technology posted a 98% slump in Q3 profits, whilst the world's largest solar panel producer Longi Green Energy complained of irrationally low solar prices as Q3 net income declined by 44% quarter-on-quarter.

- Oversupply is miring both the solar and wind markets, with Europe's struggling wind producers Orsted and Siemens Energy challenged by Chinese firms offering 20% discounts to gain market share.

- According to Bloomberg, combined Q3 earnings from China's seven largest manufacturers came in at the lowest since the end of 2021, prompting expectations that half of the firms in the sector might be out of business in the next 2-3 years if such conditions persist.

5. Price Continues to Sap the Proliferation of SAP

- In his first year in office, US President Joe Biden mandated that by 2030 the United States should produce at least 3 billion gallons of sustainable aviation fuel per year, an almost 200-fold increase compared to current levels of supply.

- As the goals were for domestic production and not consumption, the outlook for SAF in the country remains dire with prices for sustainable jet fuel almost triple the cost of regular jet, $6.9 per gallon vs $2.85 per gallon.

- Unless mandated by the government, the high cost of SAF would prompt most airlines to stick to conventional fuel and keep SAF consumption low (as of 2023, only 0.1% of the total US jet fuel pool).

- SAF producers are eligible for a tax credit of $1.75 per gallon under the Inflation Reduction Act, but even that is not enough to offset poor margins, especially as supply of feedstocks such as cooking oil is becoming increasingly tighter.

6. Oil Major Write-Downs Imperil Biden's Offshore Goals

- A string of deal cancellations is jeopardizing the Biden Administration's long-term offshore wind targets as BP, Equinor, and Orsted have all contributed to more than $5 billion in impairments in less than two weeks.

- The big news this week was Orsted's halting of two offshore wind projects in New Jersey, Ocean Wind 1 and 2, engendering impairments up to $5.6 billion and sending the world's largest wind firm's stock down 25% in just one day.

- Offshore wind developers in the US are confronted with rising feedstock costs, supply chain bottlenecks, and financing issues but, most importantly, the PPA contracts are not linked to inflation which in the current environment exposed them to huge risks.

- Whilst China has 31 GW of offshore wind capacity in operation, the US has only one operational offshore wind farm in Rhode Island totaling 30 MW in capacity, with the US DoE estimating the country's project pipeline at 52.7 GW (before the writedowns).

7. China Eyes Copper Production Capacity Caps

- Chinese authorities are considering curbs on copper processing in the country to reduce overcapacity and carbon emissions, according to Bloomberg reports, aiming for a mid-2020s start to the restrictions.

- Kpler data indicates China already imported more copper ore in January-October 2023 than it did for the entire year of 2022, at 13.7 million tonnes, as new smelters ramp up production to feed energy transition needs.

- China's copper smelting capacity stands currently at 8.8 million tonnes per year, with a 30% expansion taking place by 2026, adding another 2.4 mtpa of capacity, just as the outlook for copper supply is waning.

- Beijing has already introduced a 45-million-tonne production ceiling for aluminum production, flaunted a 1-billion-tonne refining capacity limit by 2025, and has capped steel production at 2021 levels in the past two years.