Prices of Brent have been topsy-turvy all month, as strong forces push in opposite directions. On the one hand is the sudden increased worry of a global slowdown that appeared in early August. On the other, tensions in the Middle East flare up unexpectedly, and production cuts in Libya. In this fraught context, some analysts venture to give price forecasts.
Crude oil price forecasts are divided into two camps, unfortunately: Bulls and Bears. But there are some surprising points of both agreement and disagreement that are worth pointing out. OPEC (and other producers like Exxon Mobil) have consistently warned that there is a supply crisis brewing. If demand outstrips supply, then the Crude oil price would naturally go higher. On the other hand, major global banks such as Goldman Sachs and Morgan Stanley point to the global economy as potentially pushing the price of crude to as low as $68/bbl next year.
Who’s On the Right Track
There’s an interesting bit of context that might have gone under the radar which helps understand this situation a little better. Last week, US crude inventories fell, but not as much as expected. That was the headline, and crude prices seemed to have reacted accordingly, rising in the latter half of last week. But, the reason expectations weren’t met was because of a 9% drop in exports that week. Inventories declined in the US, but were growing elsewhere to the point that consumers weren’t buying.
This is the thing that the likes of Goldman and Morgan Stanley appear to be worried about: A slowing of demand in major importers, such as China. In prior years, China has faced energy crunches due to extreme weather increasing demand for air conditioning. But that hasn’t been the case this year, as the country has continued to build out its power infrastructure and doesn’t have as much need for peaking power, which typically comes from diesel. China’s diesel fuel imports have not been as robust as the same period of last year.
Growth Vs Demand
Analysts say that China’s slowing demand for crude oil has to do with the growing demand for EVs. While that might be a factor, the major source of energy demand in China is industry, and its manufacturing sector has been in contraction for several months. One of the most energy demanding industries is steel, and it is reported to be in crisis with excess inventories and slow demand. With steel mills consuming less coal and electricity, there is more energy available on the grid, so China doesn’t need to fire up diesel (and natural gas) generators as much. That reduces demand.
This leads to predictions of crude prices remaining below $80/bbl (mostly) for the rest of the year. Barring some unpredictable flair-up of tensions in the Middle East, naturally.
What About a Rebound?
The counterargument is the standard position of both the IEA and OPEC, that if demand continues at the current rate, it will outstrip production. Oil producers are running down their current fields, and not spending much on exploration, under the logic that fossil fuels will be phased out. So, no increase in production is necessary.
Therefore, the difference between bears and bulls on oil isn’t related to oil supply, but whether or not the global economy will suffer a strong slowdown. And for that, we need more data. Last month, US NFP precipitated a global sell off in fears of a recession. Let’s see if something similar happens again this Friday.