West Texas Intermediate (WTI) oil prices have climbed off a low of US$67.88 a barrel in July to currently sit around US$91. What is causing this rise in prices and what is the outlook for this commodity?
Oil consumption
Two-thirds (67 per cent) of global oil production is consumed in transportation with another 27 per cent used for industrial heat or power generation. The balance is used in residential or commercial heating. Gasoline accounts for 41 of the 67 per cent, distillates (diesel fuel and heating oil) 15 per cent, jet fuel 8 per cent and asphalts, lubricants and petrochemicals 3 per cent.
Recent oil price moves
Slower Chinese growth, a strong U.S. dollar and recession fears have not hampered oil’s recent rise.
Figures from the International Energy Agency (IEA) show global oil supply dropped by 910,000 barrels per day (bpd) to 100.9 million bpd in July from the previous month. Output from the OPEC+ bloc (which includes 23 countries, while OPEC has 13 members) fell 1.2 million bpd over the same period to 50.7 million bpd with Saudi Arabia and Russia extending their combined 1.3-million-bpd cuts until the end of 2023.
Non-OPEC+ volumes (including the United States, which is not an OPEC/OPEC+ member) rose by 310,000 bpd. Global oil output is projected to be 101.5 million bpd in 2023. In 2024, non-OPEC+ supply is projected to rise by 1.3 million bpd while OPEC+ is expected to add 160,000 bpd.
World oil demand is being driven by strong summer air travel, increased use in power generation and rising Chinese petrochemical activity. Global oil demand is projected to expand by 2.2 million bpd in 2023 to 102.2 million bpd. In 2024, the IEA sees further growth of one million bpd.
The IEA forecasts the OPEC+ production cuts will result in a supply deficit of 230,000 bpd through the fourth quarter of 2023. OPEC projects a much larger deficit of 3.3 million bpd in the fourth quarter with the assumption of stronger Chinese demand.
U.S. crude inventories actually rose by four million barrels last week, compared with a projected 1.9-million-barrel drop. That inventory increase caused oil prices to briefly dip before heading higher again.
China’s rebound
China consumes 15 per cent of global oil production annually, second only to the U.S. China’s GDP grew 5.5 per cent year-over-year (yoy) for the first half of 2023. In the second quarter of 2023, its GDP rose by 6.3 per cent (yoy), up from 4.5 per cent (yoy) in the first quarter. The Chinese government has issued guidelines on boosting confidence in foreign direct investment and a new round of lower minimum down payments and easing mortgage restrictions to revive growth. China’s economy is hampered by a slowdown in the real estate sector and a rising unemployment rate among young adults. KPMG has lowered China’s GDP growth forecast to 5.5 per cent for 2023 and expects its economy to grow 5.2 per cent in 2024. The Organization for Economic Co-operation and Development (OECD) sees 2023 GDP growth coming in at 5.4 per cent and 5.1 per cent for 2024.
What about the switch to EVs?
Gasoline vehicles account for 41 per cent of global oil consumption. The IEA expects to see 14 million electric vehicles sold in 2023 or 18 per cent of total car sales for the year. That figure represents a 35-per-cent year-over-year increase over 2022. With the average vehicle using 475 U.S. gallons of gasoline (1,800 litres) annually and a switch of four million vehicles from gasoline to electric in 2023, the demand for gasoline should drop by 1.9 billion U.S. gallons or 45 million barrels of oil equivalent per year. Remember that compares with oil production of 100 million barrels daily, so it is a small yet growing change in demand.
Oil target prices
Analysts at Bank of America, Goldman Sachs and JP Morgan all see the possibility of crude oil prices rising above the US$100-a-barrel level because of supply cuts and sustained demand. That target includes the current projected rate of economic recovery in China. The IEA sees prices easing to an average of US$87 a barrel by the second half of 2024 with rising global oil inventories.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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