With Supply Tightening, What Next For the Price of Oil?

Figures from the International Energy Agency (IEA), for example, indicated that global oil demand was going to surge by 1.9 million barrels per day (mb/d) this year, reaching an unprecedented peak of 101.7 mb/d. Amidst this surge in demand, the IEA noted that the pace of oil supply growth, despite a 4.7 mb/d increase the previous year, was anticipated to slow down.

With expectations of rising demand and diminishing supply, the projections of oil reaching unprecedented heights in the latter half of 2023 depended on several crucial elements: the recovery of China’s economy as the nation eased its Covid-19 restrictions and the revival of global industrial activity, particularly in the United States.

That said, China’s recovery has fallen short of initial projections of an economic boom, and the global growth trajectory is currently set to decrease from 3.5% in 2022 to 3% in 2023. This decline is expected to have a dampening effect on industrial activity levels and – by extension – the oil demand.

As such, one could argue that expectations of a tightened oil market appear exaggerated, but we may still witness record oil prices in the coming months.

Room for growth in the oil markets

A significant influencer of oil price trends this year has been Saudi Arabia’s decision to curtail its oil production to stabilize the market.

As a result, Saudi Arabia’s production saw a reduction of 9 million barrels per day (mb/d) during July, representing one of the most significant decreases in oil supply that we have seen in several years. This production cut has recently been extended for another month, which should tighten the market in the short term.

This is supported by the fact that this policy is running concurrently with a wider OPEC+ strategy to wind down oil production to boost prices. As such, even if Saudi Arabia hadn’t committed to cutting production, the lack of OPEC+ production would remove 3.66 million barrels per day (mb/d) from the global supply of oil in 2023. As the supply diminishes, there is the potential for prices to ascend if production is unable to match the pace of demand.

This is already starting to happen. IEA data shows that supply indeed decreased by 910,000 barrels per day worldwide in July, while demand is steadily progressing toward all-time heights. This is primarily attributed to an upsurge in air travel demand and a concurrent increase in petrochemical activity in China, the world’s largest importer of crude oil. 

These indicators collectively suggest that oil demand is poised to reach 102.2 million barrels per day this year. But the predicted surge in prices has not filtered through as of yet.

Seasonal trends and economic uncertainty are keeping prices in check

Indeed, oil prices have experienced recent downward pressure after reaching their highest point in over 10 years last May. Although Crude WTI has recovered to $79.7849 per barrel (as of the current writing) from a significant drop to $67.300 on June 12th, 2023, there are constraints on growth that are preventing oil prices from reaching a new all-time high in the short-term.

When considering supply, for example, it’s important to highlight the increasing momentum in American and non-OPEC+ oil production. Consequently, even with the cutbacks enacted by Saudi Arabia and OPEC+, the total global oil production is projected to reach a historic peak of 101.5 mb/d in 2023. This surge in production could serve as a counterbalance, possibly moderating substantial price rises.

Furthermore, should the global economy persist in its current state of instability and unpredictability, the forecasts of demand surging to the extent anticipated by the markets might not come to fruition. This perspective is shared by the Secretary General of the IEA, who highlighted that concerns about an impending recession are counteracting price surges at present.

Additionally, the latest data from China indicates that crucial indicators like retail sales, industrial output, and investment are falling below market expectations. Considering that China’s influence is said to account for more than 70% of oil price growth in 2023, the sluggish recovery of the Chinese economy can hinder oil demand and thereby affect prices in the upcoming months.

Lastly, the progression of oil prices might encounter resistance from seasonal trends in the worldwide oil markets. To illustrate, data from Seasonax charts (available to HYCM clients*) suggests an average 14.6% decrease in oil prices between July 11th and December 18th year. As a result, the opportunity for oil to reach record price peaks could be held back as we transition further into the Autumn and Winter periods.

What next for oil investors?

Undoubtedly, the future of oil prices holds an air of uncertainty, yet this environment is poised to generate opportunities for investors in the upcoming months.

Should prices indeed experience an increase, investors can anticipate a surge surpassing $100 per barrel, thereby stimulating heightened engagement in commodities and futures markets. In such a scenario, investments in oil exploration and development could bear fruit, largely because these companies would presumably escalate their efforts to expand oil production, capitalizing on the heightened demand.

If oil prices continue to be constrained, however, investors could look towards assets and sectors that perform better during periods of economic uncertainty, such as healthcare, technology, or consumer staple stocks. Alternatively, green and renewable energy companies could provide exposure to the energy sector without relying on significant price movements in the oil market – as the switch to greener energy continues, these companies should enjoy elevated demand and growth. 

In summary, the path of oil prices in the future is characterized by uncertainty and influenced by a complex interplay of various factors that could lead to substantial increases, alongside certain economic elements that might exert downward pressure. As a result, the importance of making well-informed choices and establishing a coherent investment approach cannot be overstated when navigating this dynamic and unpredictable environment.