BRENT CRUDE OIL 2004 – 2024, $/BBL
OPEC+ seems to be ignoring the wise advice of former Intel CEO Andy Grove that:
“Only the paranoid survive”.
Last week, it argued that oil demand will rise by 2mbd this year. This was more than twice the International Energy Agency’s 900kb/d forecast. It was also very positive on China’s future demand. Yet the IEA reported that China’s demand has actually contracted in the past 4 months, also suggesting that:
“OPEC+ may be staring at a substantial surplus (in 2025), even if its extra curbs were to remain in place.“
OIL MARKETS HAVE BROKEN OUT OF THEIR WARNING TRIANGLE
6 weeks ago, we suggested that oil prices were set to “Head into a warning triangle, again”.
“Triangles” are one of the most useful ‘technical’ patterns. They highlight the continuing battle between bulls and bears to push prices higher and lower. Over time, one side starts to become exhausted, and then the battle ends.
Today, as the chart shows, the bulls seem to have admitted defeat. Prices have begun to slide. In many ways, this is a remarkable development as we are still in hurricane season. Hurricane Francine has just hit Louisiana and already 38% of Gulf of Mexico production has been shut in as crews have to be evacuated.
Yet Brent prices are down 42% since they peaked at $123/bbl in July 2022.
And last week OPEC+ had to abandon its plan to increase production next month, due to the weak state of demand.
WE HAVE BEEN HERE BEFORE
Anything can, and often does, happen in oil markets. But so far, markets are paralleling H2 2014 developments.
As the chart shows, from August 2014 prices moved into a triangle after hitting their all-time peak of $146/bbl in July 2008.
Prices then collapsed from $106/bbl in August to $47/bbl in January.
The move also highlights the geopolitical parallel:
- OPEC+ output cuts since Q4 2022 have allowed US production to rise 9% to a record 13.2mbd
- And so OPEC is again nervous about its loss of market share to higher-cost US producers
And, of course, today’s higher prices are helping to accelerate the energy transition. If prices were lower, it might be harder to justify some renewable investments. But at today’s levels, the payback periods can be very attractive.
CHINA AND INDIA ARE GOING EX-GROWTH IN TERMS OF OIL DEMAND
Oil displacement from EVs
OPEC’s problem is that we are moving into a new world of energy supply, summarised by the concept of “the electrification of everything”.
As we noted here earlier this month, more than 50% of China’s auto sales were Electric Vehicles (EVs) in July. And it won’t be long now, before its EV sales approach the 100% level.
And at the same time, as the IEA reports, China’s economy is going through a major downturn as the property bubble bursts.
So Beijing is now offering major subsidies to drivers who trade in their old gasoline car for an EV.
The idea is to support the economy and build out China’s lead in this key area for the future. But what is good for China, and for Net Zero policy, is painful for OPEC and oil producers.
India, the second largest source of oil demand growth is also going through the same process.
Almost unnoticed, as the Bloomberg chart shows, its shift to e-rickshaws leads the world in terms of replacing fossil fuels.
TRADERS HAVE BUILT A RECORD BEARISH POSITION IN OIL FUTURES
Unsurprisingly, oil traders have built a record bearish position in oil futures, as they expect:
“Consumption growth will stay subdued owing to the weakness of manufacturing across the major industrial economies.”
It would be no surprise at all to now see prices fall towards the $50/bbl level.
Read More: OPEC+ risks losing control of oil markets – Chemicals and the Economy