Last month we reiterated our view that the price of Brent would move toward $90/bbl in the second quarter. And we have now seen the price of Brent crude reach that level in early April. At the same time, the price of WTI has moved above $85/bbl.

The increase in oil prices has been supported by several factors:

  • Oil supply that has been constrained this year with additional supply cuts of 2.2 MMbbl/d by OPEC+ to go with the previous supply cuts of 3.7 MMbbl/d. There have also been lower supply increases from non-OPEC producers, including supply from the U.S.
  • Concurrently, demand growth has been moderately stronger this year than expected. We have recently increased our global demand forecast for 2024 from 1.3 MMbbl/d to 1.41 MMbbl/d. Consequently, demand has been outpacing supply.
  • The sentiment of oil traders is becoming more bullish. The net long positions of WTI traders have increased significantly with net long positions doubling since early February and are now at the highest level since October 2023 when the price of WTI was nearly $90/bbl.
  • Geopolitics are providing a boost for oil prices with the conflicts in Ukraine and Gaza escalating—and while crude oil and oil products continue to flow, the possibility of disruption is increasing, which is resulting in a risk premium with respect to oil prices.

So where are oil prices heading?

Obviously, oil prices will spike higher if the geopolitical situation spins out of control. The most influential development would be closure of tanker traffic at the Strait of Hormuz because of the volume of oil that passes through this chokepoint, which is in excess of a combined 20 MMbbl/d of crude oil, condensate and oil products.

Restricting oil-related exports from Iran or Russia would also be a significant development. At this point, we think the probability of either of these developments occurring is still relatively low. Iran has exhibited restraint since the beginning of the Israel-Hamas conflict in that Iran has not taken direct action against Israel (or U.S. assets).

There is concern that with the recent high-profile attack on Iran’s embassy in Syria that Iran will take more aggressive action. We think it is unlikely that Iran will take such action because of the inherent downside risks. Instead, we think that Iran will continue with its current strategy of using proxies to strike back. We also think that the U.S. will put pressure on Israel to limit further direct attacks on Iran, as well as take other steps to deescalate the tensions.

Additionally, we think it is unlikely that the U.S. and allies will attempt to place additional sanctions on oil exports from Iran, as well as Russia, in part because of concerns of pushing oil prices even higher. Furthermore, imposing additional sanctions is made more complicated by China being a major destination for the exports.  

We are expecting that the supply/demand fundamentals will be somewhat supportive of oil prices, but without a geopolitical shock, we are forecasting that the price of Brent will drop into a range between $86/bbl and $88/bbl during the second half of 2024.

We are forecasting that liquid supply (including crude oil, NGLs and biofuels) will increase on average by 1.24 MMbbl/d during the last three quarters of this year (in comparison to 2023) and crude supply will increase on average by 0.99 MMbbl/d.

Capex shortfall

Crude oil production from the U.S. is one of the most significant risks associated with the supply forecast. Last year, the U.S. was able to increase supply even though the rig count declined throughout the year because of improved drilling efficiencies, longer lateral lengths and the increased use of proppant, but also because of a significant drawdown in DUCs.

Increasing production this year will be more difficult and will be more dependent on the level of capex. In response to the commodity price decline in late 2023, many of the E&P companies increased focus on optimizing capital efficiency and maximizing cash flow generation. Based on our analysis of a set of top producers, planned capex for 2024 are about 11% below that of 2023.

With respect to demand, we are forecasting that oil demand will increase on average by 1.22 MMbbl/d during the last three quarters of this year.

Demand growth from China is one of the most significant risks associated with the demand forecast. During the last three quarters of this year, we are forecasting that China’s oil demand will increase on average by 0.44 MMbbl/d. Our demand forecast for the remainder of 2024 is based on China’s economic growth remaining relatively weak because of the challenges stemming from a debt-ridden real estate sector, declining direct foreign investment and tepid demand from export markets.

Recent economic data indicate some improvement in China’s economy. The official PMI for manufacturing in March increased from 49.1 in February to 50.8 in March, which is the highest level in 13 months. It is also the first reading above 50 (which indicates expansion) in 12 months. Additionally, the index for new orders increased from 49 to 53 and the new manufacturing export order index increased from 46.3 to 51.3.

Furthermore, the composite PMI (including manufacturing and non-manufacturing) increased from 50.9 to 52.7, which is the highest level since May 2023. While the latest PMIs are showing some improvement in China’s economy, the U.S. and other Western countries are still concerned about the possibility of China pushing out “cheap” exports—especially with respect to EVs, renewable energy and semiconductors. As such, China is still facing the likelihood of additional tariffs and other trade barriers, which will hamper its economic growth.