An aerial view of oil storage containers near the Chevron Pasadena Refinery in Pasadena, Texas, U.S. … [+]
The lack of clarity on crude oil demand continues to drag oil prices lower. The market’s mood music – resulting in a second successive weekly loss at the close of U.S. trading on Friday – has not materially changed on Monday.
Last week’s global cyber outage that led to banks and airlines and much else in between being temporarily knocked offline as well as U.S. President Joe Biden’s sudden, though not entirely unexpected, withdrawal from the November Presidential Election on Sunday certainly haven’t helped.
Both, the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) remain far apart in their global demand growth forecasts. According to OPEC, demand would rise by 2.25 million barrels per day (bpd) in 2024 and by 1.85 million bpd in 2025.
However, the IEA has predicted global gains to average just below 1 million bpd in 2024 and 2025, “as subpar economic growth, greater efficiencies and vehicle electrification act as headwinds.”
A Surplus Is Coming
Even if demand growth for this year is in the modest middle of both forecasts, non-OPEC supply growth can service it alone as things stand, and a surplus in light sweet crude may be factored in to traders’ thinking heading in to 2025.
More so, because the IEA reckons global supply growth next year may be much stronger, with non-OPEC output growth, mainly in the U.S., Canada, Guyana and Brazil, leading gains for a third consecutive year, adding 1.5 million bpd to the global supply pool.
This market surplus projection was lent further credence by Morgan Stanley on Friday. In a note to clients, analysts at the investment bank noted that they expect market “equilibrium” to return in the fourth quarter “when seasonal demand tailwinds abate and both OPEC and non-OPEC supply return to growth,” even if the current quarter sees a tight market.
Overall, Morgan Stanley expects OPEC and non-OPEC supply growth in the region of 2.5 million bpd in 2025. That is well ahead of demand growth forecasts for next year offered by the IEA, OPEC and several Wall Street banks.
It is doubtful OPEC can do much, or if it even intends to. Its Joint Ministerial Monitoring Committee (JMMC), which monitors the oil market, is not expected to recommend any changes to the group’s current production policy plan at its next meeting in August, according to sources cited by Bloomberg.
An OPEC+ production increase, however gradual, adds further weight to lower Brent crude prices come the end of the year and the first quarter of 2025. More so because global refinery runs will typically hit their 2024 peak in August and do not touch their high mark again until the next summer, with July 2025 being the earliest.
It is why Brent future remain in technical backwardation, i.e. a position wherein the current price is higher than prices trading in the futures market further down the road. Or in other words, futures traders expect oil prices to be lower in the months that will follow rather the front-month contract.
Translating the sentiment into the latest numbers, Brent futures contracts from January to May 2025 are all trading well below $80 per barrel, with the May contract trading at a discount of around $4 compared to September and October 2024 prices.
Therefore, barring a major economic or geopolitical shift, $75-80 per barrel Brent prices may be likely for the first half of 2025.
Read More: Morgan Stanley Sees An Oil Market Surplus In 2025 And It’s Not Alone