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Global crude oil demand growth decelerates due to escalating geopolitical tensions and stabilizing economic momentum

20 Feb 2024 14:12 IST
In sharp contrast to the forecast made by the Organization of the Petroleum Exporting Countries (OPEC), the International Energy Agency (IEA) projected global crude oil demand to decelerate growth in the calendar year 2024. The Paris-based autonomous inter-governmental organization, IEA, forecasted a slowdown in the growth of global crude oil demand due to intensifying geopolitical tensions between Israel and Hamas in the Middle East, and Russia and Ukraine in Europe.

IEA estimated global crude oil demand at 2.8 million barrels per day (bpd) in the July-September 2023 quarter. However, the crude oil demand slowed its growth momentum to 1.8 million bpd in the October-December 2023 period. A sharp drop in China underpinned an 830,000 bpd decline in global oil demand to 102.1 million bpd in the last quarter of 2023. The pace of expansion is set to decelerate further to 1.2 million bpd in 2024, compared with 2.3 million bpd the previous year. China, India, and Brazil will continue to dominate gains.

Arctic blast hit supply in January
World oil supply posted a sharp decline of 1.4 million bpd month-on-month (mom) in January after an Arctic blast shut in production in North America and as the OPEC and its allied members (OPEC+) deepened output cuts. Record output from the US, Brazil, Guyana and Canada will nevertheless help boost non-OPEC+ supply by 1.6 million bpd this year compared to 2.4 million bpd in 2023, when total global oil supply rose by 2 million bpd to an average 102.1 million bpd.

Global oil market balances tightened in January despite apparent demand weakness. An extreme Arctic freeze that swept through key oil-producing regions in the United States and Canada prompted significant supply outages that coincided with fresh voluntary output curbs by some OPEC+ countries. Escalating geopolitical tensions in the Middle East added further upward momentum, as oil tankers circumventing the Red Sea disrupted supply flows to global markets. Brent crude oil futures rose by US$5 a barrel during the month and were trading around US$83 a barrel at the time of writing.

The expansive post-pandemic growth phase in global oil demand has largely run its course. The pace of growth already eased sharply with an apparent slowdown in China underpinning the decline in consumption in the final quarter of the year. The deceleration will gather pace in 2024, with world oil demand growth forecast to average 1.2 million bpd, only half last year’s solid expansion. As of 2023, gains will be dominated by a few key countries, most notably China, and to a lesser extent India and Brazil. The three major economies are set to account for 78 percent of growth in global oil demand in 2024, which is forecast to reach a new peak of 103 million bpd.

While higher global oil supply this year, led by the United States, Brazil, Guyana, and Canada, should more than eclipse the expected rise in world oil demand, a sharp decline in output in January set the year off to a difficult start. Extreme weather conditions shut in more than 900,000 bpd of production across North America. The steep loss coincided with fresh OPEC+ voluntary output cuts of around 300,000 bpd, resulting in a massive 1.4 million bpd mom decline in global oil supply. However, the rising wave of non-OPEC+ oil growth resumes in 2Q24, driving output on an upward trajectory for the rest of the year. World oil supply is set to increase by 1.7 million bpd to a record 103.8 million bpd in 2024, with non-OPEC+ providing 95 percent of the incremental barrels.

Accelerating refinery throughputs
Refinery throughputs are set to accelerate from a seasonal low of 81.5 million bpd in February. Atlantic Basin activity will recover from United States weather-related disruptions that cut runs by up to 1.7 million bpd, despite a pickup in planned maintenance and as new capacity comes online in the non-OECD (Organization for Economic Cooperation and Development). For 2024 as a whole, refinery crude runs are forecast to rise by 1 million bpd to 83.3 million bpd, as a 330,000 bpd decline in the OECD mitigates non-OECD gains.

Refining margins recovered from January weakness in the Atlantic Basin, led by the United States Gulf Coast following the mid-month winter freeze. Although Singapore margins posted a narrow mom gain, the US$ 4.5 a barrel increase on average in the United States Gulf Coast (USGC) margins was driven by the late-month rally in cracks that pushed Atlantic Basin margins to their highest level since late September 2023.

Global observed oil stocks plummeted by about 60 million barrels in January, preliminary data indicate, with on-land inventories falling to their lowest level since at least 2016. In December, global stocks rose by 21.6 million barrels as a surge in oil on water (over 60.7 million barrels) more than offset draws in on-land inventories (less than 39 million barrels). OECD industry stocks fell by 24.1 million barrels in December, reflecting declines in all three regions.

Amid intensifying hostilities in the Middle East and North American supply outages, ICE Brent futures rose by US$ 5 a barrel during January, witnessing the first monthly gain since September. The forward structure flipped from contango to backwardation, as diverted Red Sea tanker traffic congested Asia-Europe supply chains and delayed flows into the Atlantic Basin. At the time of writing, Brent was trading at US $83 a barrel.

Robust outlook
With the robust outlook for non-OPEC+ supply, the IEA suggest a slight build in inventories in January-March 2024, despite the extension and deepening of OPEC+ supply curbs. From 2Q24 onwards, continuation of this strength could leave OPEC+ pumping above requirements for its crude oil if extra voluntary cuts are unwound in the second quarter. It is worth mentioning here that the OPEC, in a recent report, forecasted 3.5 million barrels of additional demand for the calendar year 2024, despite global economic uncertainty, intensifying turbulence in the Middle East, and a slowdown in the China’s economy.

Given heightened geopolitical risks and low global oil inventories, a modest surplus may help contain market volatility. While oil on water surged by 60 million barrels in December due to end-year tax considerations and as a number of tanker owners diverted ships away from the Red Sea to around the Cape of Good Hope, observed onshore stocks declined by nearly 40 million barrels. Preliminary data suggest further draws in January, of more than 60 million barrels, with observable on-land stocks falling to their lowest level since at least 2016, the start of our data series. Low oil inventories exacerbate the price impact of supply and demand shocks and may limit the industry's ability to respond to unexpected strength in demand or disruptions to supply.