What to expect from oil prices?
19 JUN, 2024
By Bank Of America Merrill Lynch
Bank of America's energy report warns of downward pressure on oil prices as demand weakens. Bank of America's forecast for the third quarter of the year is for an average of 90 dollars per barrel for Brent, which would fall to 86 dollars in the fourth quarter, to reach an average of 80 dollars/barrel in 2025.
By Francisco Blanch, Global Head of Commodities and Derivatives, Bank of America
Key takeaways
- Observed oil inventories have risen by 1.7 million barrels per day since mid-February, driven in part by weakening demand growth.
- Global oil demand growth slowed to 890 thousand barrels per day in 1Q24 YoY, and data suggest that consumption growth is likely to slow further in 2Q24.
- Oil will buckle if rapid inventory build-ups persist. New refining capacity to reduce Atlantic margin premium over Asia.
Global crude oil and product inventories swelled in 2Q24
As Middle East tensions de-escalated and perceived supply disruptions risks faded in April, the oil market shifted its focus back to fundamentals, which have been soft for some time. Global crude oil inventories, refined product storage in the US, Singapore, and the ARA, floating storage, and oil in transit climbed more than 200mn bbl since February, equating to ~1.7mn b/d. True, some of this storage increase is seasonal, like US propane, but inventories have risen at an unseasonable pace. China, other APAC, and Europe saw crude oil inventories rise 59mn bbl, 18mn bbl, and 22mn bbl since the end of March. Unsurprisingly, petroleum prices and structure have softened in response to loose fundamentals.
Softening demand growth & rising production
Supply growth contributed to the surplus, but demand is playing a role too. Consumption growth clearly decelerated with 1Q24, averaging 890k b/d YoY, down from 2.1mn b/d on average during 2024. OECD demand declined 290k b/d YoY in 1Q, coming in 840k b/d below 1Q22 levels. Meanwhile, non-OECD growth slowed to +1.18mn b/d in 1Q, down from an annual average growth rate of 2.1mn b/d in 2024. Although North America usage rose in 1Q, data suggest US consumption has stumbled in 2Q. Indeed, US gasoline demand has fallen 230k b/d YoY in 2Q, according to weekly data, and diesel demand was 220k b/d lower over the same period. In China, apparent diesel usage contracted 3% YoY in March and April, but gasoline demand has trended higher. India remains one of the bright spots for oil demand, with consumption rising about 3.5% ytd on a tonnage basis.
Risk to prices, margins if weak balances persist into 3Q
Consensus has been for higher oil prices into 3Q24. However, it is not yet clear whether balances will firm enough in 3Q24 to tip the market from a large apparent surplus into a deficit that can lift prices. Extended OPEC+ cuts will help, especially if compliance is high and Russia, Iraq, and Kazakhstan make up for under-compliance during the summer months. Furthermore, demand typically steps up in 3Q QoQ, and could receive a boost if manufacturing reaccelerates or Chinese stimulus kicks-in. Low spec length could fuel a volatile rally if a bullish catalyst does emerge. However, if inventory builds persist into 3Q, petroleum prices and structure will likely come under pressure. Refinery margins have softened on sluggish demand, leading to Asian run cuts. Margins may dip further in 2H if new Atlantic Basin capacity ramps on time and major outages are avoided. If that's the case, the Atlantic margin premium over Asia should narrow in the coming months.
