GEOPOLITICS: Oil markets have started to price a small geopolitical risk premium, taking Brent above $90, but still below September highs. Rising prices are a double market threat: a growing consumer tax and hit to the lower inflation narrative. The oil outlook is highly uncertain but we see four offsets to price spike fears. 1) The solution to high prices is high prices. Demand has been quick to react to prices above $90, making them ultimately self-correcting. 2) It’s not the 1970’s. Economies are now less energy dependent and OPEC less relevant. 3) No OPEC (see chart) peer seems willing to join Iran’s supply threat. Swing producer Saudi Arabia may pump more. 4) The 2006 Lebanon War, 2008 Gaza War, 2014 Gaza War saw short-lived oil impacts.
SUPPLY: Oil markets are in deficit this year, with demand growing 2.3mbpd. to 102mbpd. and OPEC cutting back supply. Iran has been the 2nd largest source of new oil, after the US, and is 4% global supply. It’s threatening to cut production, despite crude oil dominating its exports. But this call has seen no other takers in OPEC+. Saudi has significant spare capacity, pumping 20% less than last year, and could move to soothe a price spike even if its rapprochement with Israel is delayed. Non-OPEC oil supply has been growing, with the US hitting a new record and rising production from Brazil to Guyana. An easing of Venezuela sanctions may also be now coming.
DEMAND: The re-opening Chinese economy has driven 80% of the strong global demand growth this year. Demand destruction has been quick to appear in the US as prices neared $90, and economies have become less energy dependent every year, but been balanced by strong emerging market demand. The IEA sees oil demand growth more than halving next year with slowing economies, more fuel efficiency, and EV’s rise. Enough to swing the market to surplus.
All data, figures & charts are valid as of 18/10/2023.