At the time of last month’s column, the price of Brent crude had broken through $90/bbl and the price of WTI had broken through $85/bbl.
Since then, oil prices have fallen off significantly, with Brent crude breaking temporarily below $80/bbl. The oil market sold off even with the news that OPEC+ had agreed at its June meeting to extend production cuts through the rest of the year, with eight producers agreeing to maintain their voluntary cuts of 2.2 MMbbl/d at least through March.
The selloff stemmed, in part, from OPEC+ also announcing intentions to trim the cuts through September 2025. This part of the agreement raised concerns about the possibility of OPEC+ bringing barrels back to the market before additional supply is warranted by demand.
We think the oil market overreacted to the announcement because it is our view that OPEC+ will continue to be proactive in aligning supply with demand—and will, for the most part, be able to manage the inherent challenges of maintaining discipline and cohesion among the members.
Consistent with this view is OPEC moving away from publishing an estimate of demand for OPEC crude in its monthly reports to publishing an estimate of demand for OPEC+ crude. The publishing of the broader estimate for OPEC+ highlights the level of cooperation among the 12 OPEC members, plus the additional 10 oil producers, including Russia.
Another reason for the drop-off in oil prices has been the series of disappointing economic news associated with the major economies. In the U.S., the broader unemployment rate that includes discouraged workers and those holding part-time jobs for economic reasons has increased to 7.1% while the number of job openings based on the JOLTs report (Job Openings and Labor Turnover Survey) decreased to 8.06 million in April, which is the lowest since February 2021.
While China’s export data surprised to the upside (increasing by 7.6% in comparison to the previous year), domestic demand continues to be muted, as indicated by retail sales of consumer goods increasing by only 2.3% in April, which is the smallest increase since December 2022. The growth in retail sales of consumer goods has been on a downward path since November 2023, when the growth rate (year-on-year) was around 10% after rebounding back to the level typical of the pre-COVID period.
Because of disappointing economic data and oil demand growth so far this year—and the outlook for the rest of the year—we have reduced our oil demand growth forecast for 2024 to 1.3 MMbbl/d in comparison to our previous forecast of 1.4 MMbbl/d. During the third quarter, we are forecasting total oil demand to increase by 1 MMbbl/d in comparison to third-quarter 2023.
Additionally, we are forecasting:
• China product demand will increase by 0.14 MMbbl/d during the third quarter in comparison with third-quarter 2023;
• India product demand will increase by 0.50 MMbbl/d during the third quarter in comparison with third-quarter 2023; and
• U.S. product demand will increase by 0.51 MMbbl/d during the third quarter in comparison with third-quarter 2023.
Besides the extent of economic growth, there are structural factors that will affect future oil prices. One such structural factor will be the penetration of electric vehicles. Recently, there has been significant discussion in industry and media reports around a slowdown in EV sales. Looking only at sales totals of BEVs and PHEVs combined, a slowdown is not directly evident, but indications of a slowdown or deceleration in sales is clearer when looking at EV market share gains and when filtering out PHEVs.
In contrast to the upward trend in unit sales of EVs over the past two years, EV market share gains clearly decelerated, with 2023 showing an increase of 2.7 percentage points, roughly half of that seen in 2022, and also smaller than the gain seen in 2021.
Year-to-date data point to a further reduction of around 2.3%, and a far more drastic weakening (to less than 1%) if rapid PHEV growth in China is factored out.
Some key factors contributing to the sluggish growth of global EV adoption include the following:
• Relatively higher initial cost compared to ICEs;
• Phasing out of EV subsidies in many major markets;
• Insufficient EV charging infrastructure;
• Vehicle demand contraction due to high inflation and interest rates;
• Saturation of early adopters who have already embraced EVs; and
• Many buyers opting for hybrid vehicles before switching to full EVs.
While EV market share growth over the past one to two years has not been as robust as it was between 2019 and 2022, Stratas Advisors expects the duration of this slowdown to be largely limited.
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