At a recent online forum on energy hosted by S&P Global Commodity Insights, Richard Murphy of Ion Commodities read through a litany of jolts to oil markets that have roiled both supply and demand for several years.
“Since 2020 we’ve lived in a world of massive disruptions, black swan-type events that happen multiple times a year, and these are inducing a lot of operational risks for people in oil markets,” Murphy said.
He ticked off some of the big ones: interruptions in the Suez Canal by 2021’s grounding of the container ship Ever Given and by ship diversion away from the canal because of attacks by the Houthis based in Yemen; the Texas deep freeze of 2021; the sabotage of the Nord Stream gas pipeline in Europe in 2022, which impacted the flow of Russian gas; COVID; and what he called the “biggest one”: the invasion of Ukraine by one of the world’s biggest oil producers, Russia, which led to a series of embargoes both formal and informal.
And yet here the oil market stands at the close of 2024 at about $70-$73 a barrel. A year ago on the final trading day of the year, global crude benchmark Brent settled at about $77 a barrel.
Oil is at its current level only after a number of the world’s oil producers have held back more crude production off the market than they’ve ever done before in an effort to keep the price from falling even further.
A lot of oil on the sidelines
There is no formal measurement of spare capacity, but informal estimates are that about 5 million barrels per day of output is on the sidelines because the governments of those countries have decided to cooperate in an effort to limit supply. The consensus is that the level of spare capacity has never been higher.
The price level as 2024 closes would have been seen as completely unexpected in February 2022 when Russia invaded Ukraine and the world wrestled with the prospect of filling a loss of Russian production because of the formal and informal embargoes and restrictions put on the sale and movement of crude. Total estimated loss at that time: about 3 million barrels per day.
Instead, the latest monthly report from the International Energy Agency has good news for oil consumers: The balance in the market continues to favor buyers over sellers as the market goes into 2025.
Global petroleum demand growth in 2024 from a year earlier was about 840,000 barrels a day, according to the IEA. That is an extremely low number compared to recent years. Markets the past few years have been skewed by the pandemic and its impact on supply and demand. But from 2018 to 2019, the last year-on-year comparison that can be said to have been completely free of any pandemic impact, the IEA reported an increase in demand of 1 million barrels a day.
Where the good news for consumers arises is in comparing the IEA’s projections on supply and demand growth in 2025.
Demand growth in 2025 from 2024, according to the final monthly report issued by the IEA, is projected at 1.1 million barrels a day. The estimated increase in demand next year should take consumption up to 103.9 million barrels per day on average for the year.
The IEA estimate of supply in November was 103.4 million barrels a day. But its forecast also is that total petroleum supply next year – crude oil, natural gas liquids like propane and butane, and biofuels – will be up 1.9 million barrels a day off an average for full-year 2024 of 102.9 million barrels a day. That puts average supply next year at 104.8 million barrels per day, about a million barrels per day more than what the EIA estimates will be the full-year average of demand for all petroleum in 2025.
And that number assumes that all the production cuts put in place by the OPEC+ group, which consists of OPEC and a number of non-OPEC crude exporters nominally led by Russia, will stay in place though the start of a rollback in April is scheduled. On paper, the OPEC+ cuts total 2.2 million barrels a day.
That forecast of the supply/demand imbalance next year is a reason why OPEC+ decided earlier this month to keep in place a rollback of output was scheduled to launch in January. There have been other times when OPEC+ was planning to roll back some of its cuts but delayed them because of its fears the market could not handle additional supply. (But as the chart below shows, its most recent move was an increase in production).
The growth in output from the U.S. and its record output – about 13.6 million barrels a day in recent weekly estimates from the Energy Information Administration, another all-time high – as well as countries like Guyana are a key reason for that downward price pressure.
Battery vehicles making a bigger splash worldwide
But as a recent report by Argus Media – and SPGCI competitor – makes clear, a factor in market weakness continues to be the growth of battery electric vehicles in other parts of the world.
While the struggles of electric vehicle sales in the U.S. have been widely reported, that is not the case worldwide. Given that oil is a global market and what happens in one part of the world has ripple effects worldwide – the petroleum market is subject to a kind of chaos theory – what is going on in China and elsewhere with battery electric technology is having an impact in the U.S.
The focus of the end-of-year Argus report and its effect on diesel is Europe. Diesel has long been a key transportation fuel for personal cars in Europe. But that’s changing, according to Argus.
“European diesel demand is in chronic decline, a trend dating back to before the pandemic, because consumers — prompted by government policy and the rise of the ‘low emission zone’ at a local level — are shifting to gasoline and alternative fuels,” the report said. Low-emission zones in Europe restrict some vehicles with higher emission levels from entering certain areas.
“European consumers are choosing more gasoline, hybrid and pure electric vehicles — putting diesel’s market share into rapid retreat,” the report said. It estimated that diesel’s market share in Germany had declined 5 percentage points between 2017 and 2023, and the drop in France was more than 10%.
While some of the lost demand in Europe has been taken up in Asia, according to the report, “in 2024, even Chinese diesel demand turned abruptly downward, as trucking-intensive construction activity stalled and consumers turned strongly to electric cars.”
While battery-electric Class 8 vehicles have struggled in the U.S., various gains in the Chinese market – including battery-swapping facilities to minimize the downtime needed for recharging – are having an impact on diesel demand across multiple types of trucks that had previously consumed diesel, according to Argus.
On the SPGCI call (NYSE: SPGI), Jim Burkhard, the group’s vice president and head of crude oil market and energy and mobility research, said about half of new Chinese car sales were electric. “It’s clearly denting the growth” of petroleum demand, he said, adding that SPGCI believes Chinese demand for gasoline and diesel has peaked.
But that isn’t unusual. The more than 100 million-barrel-a-day market for petroleum is not made up only of gasoline and diesel. Demand for petroleum for petrochemicals has been one of the key growth stories in recent years and will continue to be, according to the IEA.
The loser in its scenario? “Gains in both years will be dominated by the petrochemical feedstocks, naphtha, LPG and ethane, while uptake of transport fuels will remain constrained by behavioural and technological changes,” the IEA said in its most recent monthly report.
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