What do softer fundamentals mean for the oil market?

Investing.com -- BofA Securities analysts, in a note dated Aug. 16, flagged that the global oil market is navigating a complex landscape marked by divergent supply and demand trends, geopolitical uncertainties, and evolving macroeconomic conditions. The note mentions of the fundamental factors impacting oil prices, focusing on the interplay between supply growth, demand dynamics, geopolitical risks, and macroeconomic influences.

Supply and demand dynamics

Supply overview:

• Non-OPEC+ production growth: Non-OPEC+ oil production is expected to increase significantly, with a projected growth of about 1 million barrels per day (b/d) year-over-year (YoY) in 2024 and 1.6 million b/d YoY in 2025. Key contributors to this growth include Brazil, Guyana, Canada, and the United States.

• OPEC+ adjustments: OPEC+ plans to potentially reintroduce some barrels into the market in the fourth quarter of 2024. This adjustment aims to manage the balance between supply and demand and reduce the current production cuts from about 6.7 million b/d to around 4.25 million b/d by the end of 2025.

Demand overview:

• Growth rate decline: Global oil demand growth is anticipated to slow down considerably. “ Yet oil demand growth is slowing down materially as EV penetration rates ramp up in China and elsewhere, so we see global oil demand growth averaging 1mn b/d in 2024 and 1.1mn b/d in 2025,” the analysts said.

• Sector-Specific trends: Despite overall growth moderation, demand for specific products such as jet fuel, diesel, and petrochemical feedstock remains robust.

Price outlook

Price forecast:

Average prices: Brent crude oil prices are projected to average $86 per barrel (bbl) in 2024 and $80/bbl in 2025, with WTI prices following a similar trend at $81/bbl in 2024 and $75/bbl in 2025.

Surplus conditions: The global oil market is expected to face a 700,000 b/d surplus in 2025, driven by accelerating non-OPEC supply and slowing demand growth.

Inventory implications:Commercial and strategic inventories: The expected surplus may lead to a substantial increase in both commercial and strategic oil inventories. This build-up could be significant, potentially restoring strategic reserves depleted in 2022.

Geopolitical and macroeconomic influences

Geopolitical risks:

• Middle East tensions: Geopolitical instability, particularly in the Middle East, presents a significant risk to oil prices. Events such as military confrontations or attacks on energy infrastructure could lead to substantial price spikes.

• Infrastructure vulnerabilities: Increased attacks on energy infrastructure in recent years, including in Ukraine and the Middle East, heighten the risk of supply disruptions.

Macroeconomic factors:

• US interest rates and dollar: The report projects lower US interest rates and a weakening dollar into 2025. This macroeconomic environment is likely to support oil prices, as a weaker dollar makes oil more affordable in other currencies.

• China stimulus: Anticipated economic stimulus in China could provide additional support to oil prices by boosting industrial activity and construction.

Potential downside risks:

• Tariffs and trade policies: Rising tariffs, particularly in the context of US presidential election outcomes, could negatively impact emerging markets (EMs) and global commodity demand. This scenario could dampen oil demand growth by up to 500,000 b/d in 2025 and flatten the Brent crude oil curve.

Comparative analysis

Energy prices relative to history:

• Current valuations: Energy prices, including oil, are relatively cheap compared to historical levels, particularly when adjusted for inflation. This valuation supports a floor for prices despite current market pressures.

Long-Dated price trends:

• Price anchoring: Long-dated Brent crude oil prices have remained relatively stable, averaging around $70/bbl over recent years. This stability suggests that while spot prices may experience volatility, long-term prices are expected to be well-supported.