How Strong Is Global Oil Demand? - Rigzone News

How Strong Is Global Oil Demand? | Rigzone

How Strong Is Global Oil Demand?

The oil market is well aware that the main reasons why oil has rallied 25 percent over the past months is reduced production by Saudi Arabia and Russia, global oil demand holding up better than feared, and still declining U.S. shale oil activity.

That’s what Skandinaviska Enskilda Banken AB (SEB) Chief Commodity Analyst Bjarne Schieldrop outlined in a new SEB report, which was sent to Rigzone on Tuesday. The big question, though, according to Schieldrop’s report, is how strong is global oil demand and how will it hold up, or even maybe increase, in the coming quarters.

“Here the spread of estimates are still all over the place,” Schieldrop said in the report.

“For Q4-23 we have the following range of estimates for global oil demand in million barrels per day 100.6, 101.8, 103.1, 103.2, and 104.7 from main oil market research providers,” he added.

“This wide spread of estimates is mindboggling … and head-scratching both for analysts and for oil producers. It leads to a wide spread in estimates for call-on-OPEC. Some say the current market is in a 2-3 million barrel per day deficit while others calculate that the global oil market today is nicely balanced,” he continued.

In the report, Schieldrop noted that the sanctions towards Russian crude and oil product exports with a ban on imports to the EU and UK has led to a large reshuffling of the global oil market flows, “which, again, has created a haze through which it is hard to gauge the correct state of the global oil market”.

“We have previously argued that there may be a significant amount of ‘pent-up-demand’ following the Covid-years with potential for global oil demand to surprise on the upside versus most demand forecasts,” Schieldrop said in the report.

“But there are also good reasons to be cautious to demand given Chinese property market woes and the highest U.S. interest rates since 2001,” he added.

“The uncertainty in global oil demand is clearly at the heart of Saudi Arabia’s production cuts since April this year,” Schieldrop continued.

“If it turns out that demand is indeed stronger than Saudi Arabia fears, then we should see increased production from Saudi Arabia. Saudi could of course then argue that yes, it is stronger than expected right now, but tomorrow may be worse. Also, the continued decline in U.S. oil drilling rig count is a home-free card for continued low production from Saudi Arabia,” the analyst went on to state.

Both crude stocks and mid-distillate stocks (diesel, jet fuel, gasoil) are still significantly below normal and the global oil market is somewhere between balanced, mild deficit, or large deficit, Schieldrop said in the report.

“The global oil market is as such stressed due to low inventories and potentially in either mild or large deficit on top,” he said.

“The latter though can be undone by higher production from Saudi Arabia whenever it chooses to do so,” he added.

Schieldrop noted in the report that the oil market continues in a very bullish state with stress both in crude and mid-distillates.

“Speculators continue to roll into the market, with net long positions in Brent crude and WTI increasing by 29 million barrels over the week to last Tuesday,” he said.

“Since the end of June it has increased from 330 million barrels to now 637 million barrels. Net-long speculative positions are now at the highest level in 52 weeks,” he added.

In a separate report sent to Rigzone on September 22, analysts at BofA Global Research highlighted that spot oil prices had rallied more than 25 percent since June, “with Brent breaking $95 per barrel … for the first time in 2023”.

“We believe this is helped by sustained OPEC+ voluntary output cuts awaiting more robust global demand growth,” BofA Global Research analysts said in the report.

“Over the same timeframe, Europe’s energy sector has outperformed the equity market by ~10pp - with E&Ps so far outpacing Big Oils,” they added.

“In our view, this is due to the fact that backwardation has steepened across the strip - suggesting Big Oil can sustain relative outperformance in a flattening Brent curve environment into 2024,” they continued.

In the report, the BofA Global Research analysts said they believe Brent’s backwardation is due to OPEC+ voluntary cuts increasing spare capacity by around 30 percent to around four million barrels per day since July.

“But although we expect less demand growth into 2024 than OPEC (+1.1 million barrels per day vs +2.2 million barrels per day), we believe more than 25 percent of current OPEC+ spare capacity will be depleted next year as Saudi Arabia and Russia boost supply,” the BofA Global Research analysts added in the report.

“This will in our view lead to a flattening of the shape of the Brent curve - currently pointing to $87 per barrel across 2024 and $80 per barrel in 2025,” they went on to state.

In another report sent to Rigzone on September 19, analysts at Standard Chartered projected that ICE Brent would average $98 per barrel in 2024 and $109 per barrel in 2025.

A report sent to Rigzone earlier this month revealed that BMI, a Fitch Solutions company, sees the Brent oil price averaging $83 per barrel in 2024 and 2025. A Bloomberg Consensus included in that report projected that Brent would average $83 per barrel in 2024 and $81 per barrel in 2025.

To contact the author, email andreas.exarheas@rigzone.com

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