“It’s Been a Chaotic Year for Data and Reporting in the Oil Markets!”

Anas alhajji, PhD , Managing Partner, Energy Advisors Outlook

If you look at oil demand forecasts by various agencies over the last 25 years, you’ll notice that at the start of the year, they diverge significantly. But as the year progresses and more data comes in, they tend to converge. However, since COVID, it’s been a complicated story. We’re seeing that the forecasts diverge, but they never converge, which is quite unusual. We are in October, and the IEA believes global oil demand in 2024 is growing at less than 900,000 b/d, while OPEC still forecasts a growth of 1.9 million b/d. We’ve never seen such a disparity. There’s also another issue. Since 2017, data in the oil market has deteriorated substantially, largely due to the way the EIA calculates shale production and the rest of the supply chain. COVID worsened the situation, and then we had Russia’s invasion of Ukraine and the rise of the “dark fleet” phenomenon, which has only further muddied the data. Add to the mix, a media that has influenced the narrative, especially this year with major elections in India and the US. The level of inaccuracy in reporting has been unprecedented this year. There’s always a grain of truth, but stories have taken on a slant that we haven’t seen before. All in all, a chaotic situation has developed on information in the oil market. On Chinese oil demand specifically, there are diversions and significant revisions. The IEA now sees growth of 150,000 b/d this year, having started the year at 800,000 b/d. OPEC has this figure at 580,000, down from 710,000 b/d. Others meanwhile suggest a decline in Chinese demand growth of up to a 300,000 b/d. There’s such a wide range of estimates due to the poor quality of data. That’s why oil prices are dropping - because market participants were overly optimistic at the start of the year. Producers and others acted on those forecasts, and we’re now facing a surplus.

Has the oil market absorbed the slower economic growth outlook for China?

China’s oil demand since 1990 has only declined twice: once in 1997 during the Asian financial crisis, and again in 2022 during the COVID lockdowns. Both were extraordinary events. This time, however, the slowdown seems to be driven by domestic factors, rooted in structural changes within China itself. There are some who argue that the current demand decline is due to the rise of electric vehicles (EVs) and LNG trucks. We’ve analyzed that too, and what impacts oil demand is not the number of EVs sold, but the number of EVs in use and how many internal combustion engines are being displaced. Globally today, we have about 50 million EVs in use, half of which are in China. The 50 million EVS have replaced only around 1.23 million b/d of oil demand, a shift that also took 15 years. So, by this calculation, China oil demand should have dropped by about 600,000 b/d, but the actual decline has been much larger than the impact of EVs and LNG trucks.

Is there an assumption that OPEC+ will increase supply from December 1st?

When OPEC+ postponed returning oil to the market by two months, it was largely due to the unexpected slowdown in China. From a game theory perspective, I would recommend proceeding with the unwinding of the cuts on December 1st, regardless of price levels or other factors. This approach would solve several issues and eliminate some of the headaches caused by overproduction from Iraq and Kazakhstan. It would also flush out those in the market who are bearish, allowing prices to reflect real fundamentals. Russia would likely support this as it would also contribute to a decline in US shale production and reduce the supply of associated natural gas, which could impact US LNG exports to Europe. The other key factor could be if China doesn’t buy oil for its SPR and inventories. The country has already started building stocks, but at lower prices. If Brent drops to around $68, we’ll see more demand from China. The question is whether it’s in Saudi Arabia’s and other producers’ interests to allow China to build these inventories, which could later be used against them when prices rise.

Is the bet by Gulf NOCs on chemicals displacing mobility fuels, a sound strategy for the future?

There are several academic studies that show that manufacturing solar panels, wind turbines, and EVs, increase demand for oil and gas products. If you go back a few years, the Saudis introduced the “oil for materials” concept. The idea was that anything made from wood or steel could be replaced by materials made from oil. The message was clear: if you don’t want my oil for vehicles because you’re shifting to EVs, I’ll make sure the body of those EVs is made from oil. If you’re going for solar, I’ll ensure your solar panels are made from oil-based materials. The same goes for wind turbines - I’ll provide the oil for the blades. One criticism I have of long-term outlooks is that they focus on consumer behavior and climate-related changes but fail to account for how producers are adapting. For example, producers are working hard to extend the lifespan of oil demand by finding new markets, like petrochemicals. The industry always finds ways to protect its interests by controlling the competition.

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Over the last week, Gulf Intelligence has held high-level interviews with energy experts in the Middle East, Asia, Europe, and the US. This intel is harvested from the exclusive briefings.

ENERGY MARKETS VIEWS YOU CAN USE

Dr. Carole Nakhle 
CEO, Crystol Energy        

It’s not a simple “Harris bad, Trump good” scenario for oil.

It’s important to remember that we’ve seen record production for both oil and gas in the US, more under a Democratic president than a Republican one. We have however, seen under the Biden-Harris administration, the ban on issuing licenses for future LNG exports, which adds a layer of uncertainty. If Trump is re-elected, the domestic industry would likely receive a short-term boost, but ultimately, it’s still guided by international oil prices. The industry is highly fragmented and competitive, with significant private-sector involvement. US relations with China, Russia, and Iran also come into play. Under Trump’s last Presidency, he reduced Iranian oil exports to about 500,000 b/d. Under Biden, enforcement has been lax, with Iran putting more oil on the market. The same questions apply to Russia and potential sanctions on its oil and gas.

Is OPEC+ likely to proceed with adding supply in December as planned?

Most likely they will. However, bear in mind that OPEC+ is already overproducing beyond its quotas due to ongoing issues with “cheaters” like Iraq and Kazakhstan. Despite promises to compensate for this, we’ve yet to see those countries deliver. If OPEC+ moves forward with unwinding the voluntary production cuts, given the current demand scenario and non-OPEC+ supply, we should expect downward pressure on prices. That said, geopolitics can always change the equation, so there’s still a high degree of uncertainty in the markets.

Is OPEC+ unity at risk under this more challenging price environment?

The frequency of countries leaving OPEC+ has increased recently; the members do have divergent interests, but it hasn’t posed a significant threat to the organization as a whole. If the bigger players stick to their production decisions, it should continue to function. However, Iraqi overproduction is not something the group can afford to overlook; it’s the second-largest producer after Saudi Arabia. The challenge of compliance will be a persistent issue, and more so if market dynamics remain as they are today.

Cem Saral 
CEO, Cockett Group        

Geopolitical risk premium appearing in marine and shipping?

Since the start of the Israel-Gaza conflict, about 20% of global shipping has been rerouting from Suez, through the Cape. That adds about 40% more travel time, which translates to roughly a 6–8% increase in global fuel demand. This also results in a similar increase in CO2 emissions, as the industry is still in the early stages of addressing decarbonization. The premiums, however, have not been impacted as drastically as initially expected. The global marine fuel supply chain has adapted, with changes in demand shifting predominantly toward the East, especially China and Singapore.

Your thoughts on the decarbonization journey in the shipping sector?

There’s more awareness and activity toward decarbonization across the shipping and marine fuel industries. But if you look at the data, unfortunately, the ambition versus the reality seems quite different. Currently, there are about 61,000 ships in the global merchant fleet, and less than 1,500 of those have the capacity to use alternative fuels. That’s only about 2.4% of the global fleet. Another important factor is the order book - ships scheduled to be built over the next few years. There are about 5,200 ships on order, and the good news is that roughly half of those will be capable of using some form of alternative fuel. However, even combining these with the current fleet, we’re still looking at no more than 5% of the global fleet being alternative fuel-capable over the next few years. A key challenge is not only ship financing but also the capacity to build new ships, which is directly tied to shipyard capacity. That utilization is quite high, which means there are significant bottlenecks in getting new, alternative fuel-capable ships in the water before the end of the decade. Additionally, new regulations are coming into play, such as the EU ETS, which is a trade of carbon emissions for use in conventional fuels with the matching EU allowances.

Brian Pieri 
Founding Member, Energy Rogue        

Outlook for US and LATAM production?

The US has increased production by 100,000-200,000 b/d over the course of the year so far. I expect a slight uptick in the fourth quarter, to bring the year-on-year rise to 200,000-300,000 b/d. Brazil has been the one to consistently surprise upwards, while Venezuela has seen steady growth. For 2025, US production is likely to remain flat unless we see a higher price. And with larger resource plays now in the hands of the majors, capital might be deployed in international markets, like Guyana or Nigeria, rather than drill more the US. It’s now more of a portfolio-based decision for the majors. Unlike five years ago when the decision was to drill or not drill the Permian, they have global options that may offer better economics.

Does the outcome of the US election affect its energy production and exports?

It does, but it takes about two years for these policies to really influence fundamental supply and demand. One of the overarching policies launched by the Biden administration is the Inflation Reduction Act (IRA), which included many restrictive measures on oil and gas. For example, US oil production is currently around 13.4 or 13.3 million b/d; about half of that is produced by infrastructure that has been in place for 40 to 50 years. If the measures in the IRA were fully enforced, it could potentially shut down half of that, largely because of penalties on methane emissions, which would make maintaining older infrastructure too costly. However, there has been some pushback on these policies, as it’s become clear that cutting half of US production isn’t feasible. So, while there may be a relaxing of policies if Trump were elected, it likely wouldn’t move the needle significantly. Harris is also moving closer to the center than Biden on some green policies, acknowledging that the technology for full green energy adoption isn’t quite there yet, and the reality that the US population would not be willing to tolerate brownouts or blackouts.

Choeib Boutamine  
Energy Advisor & CEO, Ranadrill Consulting        

OPEC+ made a big mistake in September when they postponed releasing volumes.

That sent a negative sentiment to markets and investors. When they first announced in June that they would be increasing production in Q4, prices held steady at around $80 to $83. When they suggested waiting until December to resume pumping, prices dropped. They need to move forward with the plan to release voluntary cuts in December; if they don’t, someone else will, like Iraq or Iran, or even non-OPEC+ producers. They need to protect market share and maintain unity within the group, with some members having capacity to increase production.

Can the market absorb extra barrels today?

OPEC+ is facing many complex factors, particularly fundamentals. We saw China’s oil demand drop by half a million b/d in August, year-on-year, marking the fourth consecutive month of decline. And China is not the only economy facing recession. Still, even if the group adds the planned 180,000 barrels in December, it won’t have a significant impact. OPEC+ can’t change global economic trends; they can only make incremental adjustments to retain market share.

Outlook for future investment in Algeria’s oil and gas capacity?

Algeria’s main market is Europe, and those countries are focused on securing natural gas supplies as part of their Energy Transition. European nations are increasingly focused on renewable energy, and we recently saw promising developments in Algeria, with several companies - including from Italy, Germany and Austria - signing MOUs, to explore hydrogen exports to the EU. This is an exciting new challenge for North African countries, which have significant potential in the green energy sector, including hydrogen.

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