Power Up: Dog days are certainly not over for oil

Oil prices likely to remain close to current band of between US$75 to US$85 per barrel for the rest of this year
Concerns about global economy have offset OPEC production cuts and geopolitical tensions
OPEC poised to decide in October on maintaining or relaxing output cuts

Dog days – an idiom for a period of stagnation – rather accurately describes crude oil, with competing pressures ensuring that prices have spent most of 2024 to date trading in a fairly narrow band.

The benchmark Brent crude has traded largely between US$75 to US$85 per barrel with occasional forays above and beyond this range.

While there are certainly some bullish pressures, such as OPEC’s ongoing output cuts and geopolitical tensions in the Middle East, these are offset by ongoing concerns about the state of the global economy.

The latter is enough for Bloomberg to note that international prices are down 12% from their peak this year even as summer driving draws down US inventories.

While US demand has been robust this summer – enough to see global oil demand increase by 870,000 barrels per day (bpd) in Q2 2024, the International Energy Agency pointed out earlier this week that current steep stockpile draws will end in the next quarter.

This means that overall demand is likely to increase by less than 1 million barrels per day (MMbpd) this year and the next due to “comparatively lacklustre macroeconomic drivers” coming to the fore.

The IEA noted questions over the health of the global economy re-emerged after Japan increased interest rates sparking a reversal in Yen carry trades, China’s economic outlook deteriorated and US hiring slowed in July.

Additionally, China’s oil demand contracted for a third consecutive month in June due to a slump in industrial inputs.

Even OPEC acknowledged this in its Monthly Oil Market report for August, revising its global demand increase forecast for 2024 down slightly by 135,000bpd to 2.1MMbpd and attributing this to softening expectations for China’s oil demand growth in 2024.

It also pulled back 2025 demand increases by 65,000bpd to 1.8MMbpd.

Which way will oil go?

It isn’t likely to get any better with the IEA flagging that if OPEC and its allies proceed with plans to roll back production cuts from October, the market could shift towards a surplus.

While this is unlikely to make much of an impact this year, the market could experience a substantial glut by 2025 if the oil cartel doesn’t decide to pause or reverse the increases.

The question of course is what OPEC+ will ultimately decide to do.

There are arguments both for and against either maintaining the output cuts or reversing them.

Bringing production back up could prove beneficial for OPEC+ economies if prices remain consistent but could prove detrimental if it causes a glut and result in prices falling.

What OPEC+ is more likely to do is to keep production cuts at the current level and adopt a wait and see attitude.

This has the benefit of potentially preventing a possible supply glut, which could keep prices at least at current levels.