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Informist, Friday, Dec. 27, 2024

 

By Ashutosh Pati

 

MUMBAI – Crude oil prices could face severe headwinds in 2025 as market participants expect a global surplus in the oil market due to weakening demand and a rise in production in the US and countries that are not part of the Organization of the Petroleum Exporting Countries and allies.

 

OPEC lowered its forecasts for growth in global crude oil demand in 2024 and 2025 for a fifth consecutive month in December. The growth forecast for 2024 has been trimmed by nearly 210,000 barrels per day to 1.6 million barrels per day. In 2025, the cartel sees demand for crude oil rising by 1.4 million barrels per day, 90,000 barrels per day lower than the previous month's estimate.

 

Moreover, eight members of OPEC and its allies--Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman--extended their voluntary production cuts of crude oil till the end of March. OPEC now plans to increase supply at a slower pace, taking 18 months to return to full supply, compared to 12 months earlier.

 

"Even after a handful of OPEC+ members decided to further delay the return of 2.2 million barrels per day of additional voluntary cuts, our balance is still showing that the market will be in surplus through 2025--although admittedly the surplus is more modest following action taken by the group," Warren Patterson, head of commodities strategy at ING Economics, said in a report.

 

"The scale of the expected surplus has shrunk from more than 1 million barrels per day to around 500,000 barrels per day now," Patterson added.

 

On the other hand, the International Energy Agency expects a surplus of 950,000 barrels per day in 2025 due to uncertainty about when the unwinding of OPEC's voluntary production cuts will actually start. However, if the cartel unwinds the voluntary cuts from the end of March, the supply overhang could rise to 1.4 million barrels per day.

 

Oil prices pushed towards $73 per barrel in early November due to tighter sanctions by the US on oil exports from Iran and concerns about output in the US because of Hurricane Rafael. Prices then corrected sharply as market sentiment was weighed down by concerns about the effectiveness of China's stimulus measures. Moreover, Donald Trump's victory in the US presidential election led to a sharp rise in the Dollar Index which weighed on prices.

 

Sluggish demand from China, the top oil-importing country, is also impacting the global oil market. China has announced a number of stimulus measures since late September, but the full impact of these measures is yet to be seen. Analysts expect China to roll out additional measures with the potential for trade frictions with the US next year.

 

"In addition, China has been seeing stronger sales of new energy vehicles in the domestic market, which will be displacing oil demand. More than 40% of vehicle sales are now new energy vehicles," Patterson said. There has also been a significant pick-up in the sale of LNG-powered trucks, which will be displacing diesel demand, Patterson added.

 

ING Economics sees the price of West Texas Intermediate crude at an average $68 per barrel and Brent crude at an average $71 per barrel over 2025. At the time of writing, the most-active February WTI crude oil contract on the New York Mercantile Exchange was at $69.76 per barrel.

 

In terms of production, the US Energy Information Administration sees global oil output rising by 1.6 million barrels per day in 2025 and expects almost 90% of the growth to come from non-OPEC countries. Crude oil production in the US, the largest producer of the commodity, is at an all-time high of 13.6 million barrels per day.

 

Production outside of OPEC and its allies rose 1.9 million barrels per day this year, led by growth in the US, Canada, and Guyana. However, this growth was partly offset by production from OPEC and its allies falling 1.3 million barrels per day.

 

US president-elect Trump has threatened to impose an additional 10% tariff on imports from China and 25% on imports from Mexico and Canada. "The risk is that we see some trading partners responding with retaliatory tariffs against the US, which could have an impact on demand for US oil and refined products," Patterson said.

 

The EU and the US are continuing stricter sanctions on Russia's oil trade, which has provided some support for oil prices recently in the face of mounting downward pressure. "US sanctions on Russian crude oil have significantly impacted global trade dynamics, leading to a reduction in Russian oil exports to Western markets and a shift in supply routes," said Indrajit Paul, head of research at Agrocorp International.

 

India is the world's third-largest oil importer and has capitalised on the discounted Russian oil, with imports reaching 1.52 million barrels in November. "However, recent sanctions have complicated this trade, making it more challenging for Indian refiners to secure Russian crude," Paul said. "This situation has prompted Indian state-owned refiners to explore alternative sources, including increased imports from the Middle East (West Asia), which rose by 10.8% to 2.28 million barrels per day in November."

 

Another key factor that is supporting oil prices in the short term is the ongoing Russia-Ukraine war, which continues to raise concerns about disruptions to global oil supply. "Any disruption to Russia's oil infrastructure, whether due to direct attacks or ongoing sanctions, could create significant uncertainty, keeping traders on high alert," Kotak Securities said in a report. Russia is among the world's largest oil producers with an output of nearly 9 million barrels per day.

 

Ajay Kedia, director at Kedia Advisory, expects WTI prices to hover at $60-$80 per barrel next year. On the domestic exchange, Kedia sees prices in the range of INR 4,850-INR 6,800 per barrel. At the time of writing, the most-traded January crude oil contract on MCX was at INR 6,002 per barrel.  End

 

US$1 = INR 85.53

 

Edited by Rajeev Pai

 

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