Global oil demand growth will slow in 2024 as overall economic activity cools, says Emirates NBD Research. The absence of a strong demand story like the return of China from Covid-19 will limit upside risk to demand, writes Edward Bell, Head of Market Economics, Emirates NBD Research.

 

Supply from outside of the Opec+ alliance will expand by more than 1 mbpd in 2024, led by North and South American production.

 

Several Opec+ members will extend voluntary cuts into Q1 though compliance will be critical in order to avoid overwhelming oil markets. Production will only be able to tentatively return to markets over the rest of 2024.

 

Prices to linger

Oil prices will linger in a sluggish global economy with Brent to average $82.50/b. Downside risks stem from worse than expected demand or a potential breakdown of the Opec+ alliance of producers.

 

The global economy looks set to tread water in 2024 as recovery in China cools and developed economies contend with the effects of high interest rates. The IMF’s projections for 2024 have global output easing to 2.9%, down from 3% in 2023 and 3.5% in 2022. The US economy is set to cool sharply as the Federal Reserve navigates its way to a soft-landing and the Fed itself projects growth at 1.4% for 2024 compared with 2.6% in 2023. 

 

That disappointing outlook for global growth is weighing on the prospects for oil demand after a strong 2023 when consumption was helped by the return of China from its stringent Covid-19 restrictions.

 

Oil demand projections from the IEA are for a substantial slowdown in consumption growth in 2024. From demand growth of almost 2.3 mbpd in 2023, consumption growth will drop to just 1.06 mbpd in 2024. Unlike in 2023 when China’s reopening helped to lift oil consumption, there will be no clear standout country on oil demand for 2024 as most economies endure the impact of tighter monetary policy and elevated overall price levels, even if the pace of inflation is cooling.

 

IEA outlook in contrast

The IEA outlook for demand stands in sharp contrast with Opec which projects another strong year in 2024. The producers’ alliance estimates that oil demand will grow by 2.3 mbpd, mostly accounting for rising non-OECD demand but the major divergence between the two forecasting agencies lies in the outlook for OECD demand. 

 

Opec expects OECD demand will accelerate in 2024 by almost 260k bpd while the IEA estimates a near equivalent sized decline in consumption. Slower economic activity across developed markets will limit investment and industrial appetite, weighing on oil consumption. A “soft landing” in many markets may dampen the slowdown somewhat but oil demand accelerating while economic output slows appears incongruous.

 

Gaps in OECD demand forecasts

Even as Opec itself had been consistently forecasting another year of robust oil demand growth for 2024, several members of the Opec+ alliance outlined further voluntary production cuts for Q1 2024. In total, the cuts amount to about 2.2 mbpd though that includes 1 mbpd of output restraint from Saudi Arabia which it has maintained since July 2023, the so-called “lollipop,” and 500k bpd of production and export curbs from Russia. 

 

The new volumes to be cut are shared amongst Iraq (223k bpd), the UAE (163k bpd), Kuwait (135k bpd), Kazakhstan (82k bpd) along with smaller adjustments from other members of the Opec+ grouping. Along with these cuts, new quotas were announced for several members with Angola allocated a lower target for 2024.

 

The new cuts do not form part of a wider Opec+ agreement and compliance would thus rely on individual producers seeing a benefit (presumably higher prices) in order to sacrifice market share. In prior agreements, members that exceeded their target levels would have to compensate by deeper subsequent cuts. These voluntary cuts have no such enforcement mechanism. The lack of a wider Opec+ deal suggests that there is some dissent among members about seemingly having to perpetually adjust output lower. In the wake of the announcements on new targets Angola immediately rejected the level it had been assigned.

 

Opec+ production cuts during the pandemic helped to bring oil markets closer to balance but as prices have recovered thanks to higher demand the argument of using cuts to reduce volatility seems to be losing credibility. Opec’s own assessment of strongly rising oil demand would seem to work against the plan to cut production unless it is solely an attempt to support oil prices. After the cuts were announced at the end of November several oil ministers from Opec+ noted they could be extended beyond Q1 as oil prices dropped substantially over the following sessions.

 

The effectiveness of Opec+ cuts in supporting prices is waning and with no enforcement mechanism for over-producers, markets have cast serious doubt on how meaningful the voluntary cuts will be. The main beneficiary of the cuts actually seems to be non-Opec+ members who aren’t bound by any production restraints and who will still reap the benefit of rising oil prices: both the IEA and Opec estimate that US oil supply will expand by about 600k bpd in 2024.

 

Core Opec producers output vs target levels

Were the voluntary cuts to be implemented in full for Q1 then oil markets would remain in a modest deficit of about 500k bpd. But after that a substantial volume of Opec+ oil would be returned to markets—including Saudi Arabia’s 1 mbpd lollipop—that would likely overwhelm markets and lead to stockbuilds. 

 

As non-Opec+ supply is set for further increases in 2024, output from key producers like Saudi Arabia, the UAE or Iraq will only be able to come back into the market tentatively which may fuel further frustrations with the Opec+ framework.

 

The effectiveness of the 2024 cuts will depend on compliance with targets, with data for Q1 only available by late January when production and export volume flows will be visible. At this time, we expect that those countries that volunteered cuts for Q1 will come close to full compliance but that they will creep output higher for the rest of the year.

 

With some compliance with the Q1 voluntary cuts, oil markets will likely be close to balanced in Q1 compared with a draw of almost 500k bpd in a full compliance scenario. “For the rest of the year we expect to see markets slightly over-supplied as Opec+ and non-Opec+ supply flows to market amid slower demand growth than in 2023,” he says.

 

Balances for 2024 under compliance, baseline scenarios

An oversupplied market, even if only modestly so, will be a headwind to prices for 2024 and we now expect them to trade with a much flatter trajectory. For 2024 we now target an average Brent price of $82.50/b, moving from $85/b in Q1 to $80/b for Q2-Q3 before returning to $85/b in the final months of the year. 

 

For WTI the trajectory will be similar but at a shallower base and we target an average of $77.50/b for 2024. Slowing demand growth and an oversupplied market will likely mean a consistent contango structure in both markets.

 

Oil prices outlook for 2024

Risks to the outlook stem primarily from how demand materialises next year. If it indeed comes in as strong as Opec+ estimates then market balances will be much tighter and require higher prices to clear. In that scenario there could be room for Opec+ to return barrels to the market so the upside risk to our baseline forecast is relatively limited.

 

On the downside, however, demand could fail to hit even the IEA’s modest targets and result in wider market surpluses. We would also note the risk of a disorderly end to the Opec+ production alliance as a substantial, if remote, downside risk for prices if members feel that there is little benefit to restraining production.--TradeArabia News Service