Oil prices have faced a downturn this week, reversing recent gains due to easing geopolitical tensions and persistent demand worries. On Monday, U.S. Secretary of State Antony Blinken announced that Israeli Prime Minister Benjamin Netanyahu had agreed to a cease-fire proposal to halt the Gaza conflict. However, on Thursday, White House sources revealed that a deal is unlikely, as Hamas is expected to reject the Israeli terms, which include controlling the Philadelphi corridor—an area Israel claims is crucial for Hamas.
Crude oil futures saw a notable drop on Wednesday, with WTI crude falling to $72 per barrel and Brent crude briefly dipping below $75. Weak demand prospects from China overshadowed any potential gains from supply risks, with recent data showing an 8% year-over-year decline in China’s crude demand for July.
Commodity analysts at Standard Chartered analyzed global oil demand using the latest Joint Oil Data Initiative (JODI) report released on August 19. According to Standard Chartered, global oil demand reached a record 103.01 million barrels per day (mb/d) in June. The revised data for May shows demand at 102.68 mb/d, the second-highest monthly average after June. The second quarter’s average demand growth was 1.521 mb/d year-over-year, close to Standard Chartered’s 2024 growth forecast of 1.514 mb/d.
The only negative aspect in the report is the slowdown in demand growth. June’s demand growth was 788 thousand barrels per day (kb/d), down from 1.267 mb/d in May and 2.129 mb/d in April. Standard Chartered predicts global demand will stay above 103 mb/d for the rest of 2024 but drop to 101.9 mb/d in January due to seasonal factors.
Global crude supply growth remains limited, with June supply increasing by 160 kb/d month-over-month to 102.097 mb/d, still below December 2023’s record high of 103.162 mb/d. The slow supply growth is primarily due to weak non-OPEC contributions, particularly from the U.S. U.S. oil production is expected to grow by only 2.3% this year, as shale producers maintain production discipline and focus on returning capital to shareholders. Crude exports from U.S. ports have averaged 4.2 million barrels per day this year, a modest 3.5% increase year-over-year compared to a 13.5% rise in 2023. This year’s growth rate is the lowest since 2015, when the U.S. lifted its 40-year ban on crude exports.
U.S. shale producers are hesitant to increase drilling. High decline rates for shale wells soon after commissioning require additional well completions to maintain output. Earlier in the year, Standard Chartered noted a sharp decline in the horizontal rig count, which is now 20% below its post-pandemic peak. Although previously drilled wells and technical advancements offer some offset, a significant decrease in activity often leads to a delayed decline in growth.
Gas Prices Lose Momentum
The surge in Europe’s natural gas prices that began in July appears to be losing steam due to high inventory levels and reduced supply concerns. Dutch front-month futures, Europe’s gas benchmark, were quoted at €37.22 per megawatt-hour on Monday, largely unchanged over the past 10 days but significantly higher than a month ago when it was €30.10 per megawatt-hour. In the U.S., Henry Hub prices have been more stable, trading at $2.15/MMBtu compared to $2.01/MMBtu a month ago.
Recent data from Gas Infrastructure Europe (GIE) indicates that EU gas inventories are approaching the EU Commission’s 90% capacity target, 10 weeks ahead of the November 1 deadline. As of August 18, inventories stood at 104.23 billion cubic meters (bcm), achieving a fill rate of 89.8%. German storage is already at 93.3% of capacity, surpassing the country’s September 1 target of 65%.
Last month, the U.S. Energy Information Administration (EIA) forecasted a strong rally in U.S. natural gas prices in the second half of the year due to production cuts. The EIA expects Henry Hub natural gas spot prices to average nearly $2.90 per million British thermal units (MMBtu) in the second half of 2024, up from $2.10/MMBtu in the first half, marking a nearly 40% increase.