Growing concerns about oil demand could affect OPEC’s production plans
Despite hopes for U.S. interest rate cuts and forecasts of tightening oil supplies later in 2024, crude markets took a hit last Friday, continuing a downward slide. Over the past seven weeks, crude prices have dropped in six, reflecting deeper concerns in the market.
Several key factors are driving this decline. Weak manufacturing data from Europe, Asia, and the U.S. is putting serious pressure on oil. In the U.S., the Purchasing Managers’ Index (PMI) hit its lowest point in eight months in July. The eurozone has been in a two-year contraction, and China’s PMI fell below 50, signalling an economic slowdown. All of this adds up to a significant drop in global demand for oil.
On top of that, the U.S. Labour Department revised its job numbers for the 12 months up to March, showing that over 800,000 fewer jobs were added than initially thought. This has only heightened worries about oil demand in the world’s largest economy.
These growing concerns about weak global demand could also affect OPEC’s plans to ease up on production cuts in October. But with some oil producers eager to pump more, sticking to the current cuts is easier said than done. Any production boost could add even more strain to an already struggling market.
OPEC isn’t likely to reverse last year’s production cuts, even as non-OPEC countries ramp up their output, adding pressure to prices. As Irian Slav points out in Oilprice.com, rising production from the U.S., Guyana, and Brazil is complicating OPEC’s plans. The U.S. alone boosted output by about one million barrels per day last year, although growth has slowed in recent months.
The U.S. Energy Information Administration (EIA) projects U.S. production will only grow by a modest 300,000 barrels per day this year. At the same time, the EIA has revised its oil demand growth forecast lower, to 1.1 million barrels per day. Brazil also saw a 13 percent increase in oil production last year, reaching a record 3.4 million barrels per day, but production has since slipped to 3.1 million barrels per day as of April. Meanwhile, Guyana’s output has surged to over 600,000 barrels per day this year, with expectations of hitting 800,000 barrels per day next year.
With global oil demand growth expected to slow further, this added production will likely throw the supply-demand balance even more off-kilter, creating more challenges for the market.
China’s economic slowdown is another big factor impacting global oil demand. During the first seven months of 2024, Chinese crude imports were down by 320,000 barrels per day compared to last year. However, this drop isn’t just about a slowing economy. The biggest factor is China’s transition to new energy vehicles (NEVs), which include electric and hybrid cars. In July, sales of NEVs in China outpaced those of traditional vehicles for the first time, marking a significant shift in energy demand.
Meanwhile, oil markets seem to be less reactive to geopolitical shocks. Despite ongoing tensions in the Middle East, including potential conflicts between Iran and Israel, we haven’t seen a significant war premium added to global crude prices. Helima Croft of RBC Capital Markets notes that geopolitical risks no longer drive oil prices as they once did, with traders now focusing more on demand concerns.
The market is clearly shifting in a new direction.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
For interview requests, click here.
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