Supply and demand uncertainties plague oil market

Unexpectedly weak oil demand in China so far this year is one of the factors that OPEC+ members will be considering when they meet at the next Joint Ministerial Monitoring Committee at the beginning of October. But there are a number of other factors which could affect their decision on whether or not to ease the 2.2 million barrels a day (bpd) of production cuts that are currently in place.

These cuts were originally agreed in 2020 when Covid struck and oil demand fell sharply. They were steadily eased as the pandemic passed but restrictions on output were introduced again in April 2023 and it is these that will be the subject of discussion at the October meeting.

Softer Chinese demand is mirrored elsewhere as geopolitical tensions and slower growth affect many regions. Global oil demand growth has slowed down over recent quarters even as some OPEC+ members, notably Russia, exceed OPEC+ output quotas.

Shipbroker Gibson notes that OPEC+ recently cut oil demand growth expectations to 2.11 million bpd this year, but so far this increase has not materialised. Further downward revisions to projections may be required and the issue casts doubt on the cartel’s forecast of a 1.78 million bpd demand increase in 2025. The broker notes that the International Energy Agency has a more moderate demand growth forecast of 0.95 million bpd for next year.

Related:OPEC production cuts to impact VLCC market

Meanwhile, Poten notes that more non-OPEC production has come on stream since the pandemic, with the US, Canada, Guyana, and Brazil increasing output and eating into OPEC’s share. More non-OPEC crude will hit the market in 2025: the International Energy Agency forecasts that supply is likely to rise by 1.75m bpd, significantly more than likely demand growth of 1.0 million bpd. Owners of smaller tankers will be closely watching developments in these non-OPEC countries where output is rising.

For VLCC owners, what happens in China is the most important factor because of the long-haul nature of the trade. But the strategy that OPEC+ members adopt at the October meeting is a key factor too. If the cartel members decide to ease the present production restrictions, the process will take place gradually over time. Poten observed: “If they start to roll back their production cuts, it will be very slow and in small increments, so as not to flood the market and undermine oil prices.”

Brent oil prices closed last week at $77.58; West Texas Intermediate at $74.91.