Brent crude oil futures are currently in correction mode, primarily due to uncertainty surrounding China’s economic outlook and its stimulus package. This insight comes from Mukesh Sahdev, Global Head of Commodity Markets – Oil at Rystad Energy, in an update shared with Rigzone on Monday.
Sahdev noted that a recent press conference by China’s Finance Ministry indicated a strong push to revive the struggling economy. The government aims to support local government debt and bolster the property market. The Chinese central bank has announced an injection of one trillion yuan to assure investors of its commitment to achieving a 5% GDP growth target.
However, Sahdev pointed out that the lack of a clear timeline and measures to tackle structural issues, such as weak consumption and reliance on infrastructure investments, has heightened ambiguity in the market. Rystad Energy anticipates that support for oil prices will be short-lived unless the government provides more detailed policy measures in the coming weeks, particularly as the Standing Committee of the National People’s Congress prepares to review and vote on the proposal.
As markets await developments in China, U.S. inflation rates fell to 2.4% in September 2024, bringing the Federal Reserve closer to its target of 2%. This decline has fostered optimism that potential rate cuts will help steer the economy toward a soft landing, avoiding a recession. Additionally, Eurozone inflation is expected to be reported at 1.8% for September, down from 2.2% in August. The European Central Bank (ECB) is expected to announce a quarter-point rate cut on October 17, lowering rates to 3.4%.
Oil Demand Fundamentals
Regarding oil demand, Rystad noted that China’s Golden Week holiday had temporarily boosted gasoline demand. However, a decline is anticipated now that the holiday is over. Cooler temperatures and reduced rainfall could support increased construction and industrial activities, as well as agricultural harvesting and plowing.
Rystad estimates that China’s oil demand growth will slow significantly, contributing only 108,000 barrels per day (bpd) in 2024. The report indicated that gasoline demand has plateaued, with electric vehicle sales now exceeding 50% of total sales. Additionally, distillate demand has dropped by 100,000 bpd due to economic challenges and the growing use of LNG trucks. While naphtha demand for petrochemicals remains robust, its growth is starting to slow. Jet fuel, on the other hand, is one of the few products showing signs of recovery, thanks to increased international flight demand.
Oil Supply Analysis
On the supply side, the report highlighted Iraq’s ongoing struggle to comply with OPEC+ production quotas. Throughout the first half of the year, Iraq averaged an overproduction of about 300,000 bpd. This surplus was reduced to nearly 200,000 bpd in August due to increased pressure from OPEC to adhere to quotas. Meanwhile, Russia reportedly met its OPEC+ voluntary cut target in August and began compensating for overproduction in September, though an overproduction of around 40,000 bpd is still estimated.
The report emphasized that ongoing supply losses from Iran and significant trade flow disruptions will keep the market tense. The U.S. has expanded sanctions on Iran’s oil and petrochemical sectors and is urging Israel to seek alternatives to attacking Iran’s oil and nuclear facilities.
Price Outlook
Rystad believes that oil prices will likely remain near the $80 range, as backwardation in the crude market is a key goal for OPEC+. Currently, the Brent M1-M3 backwardation is hovering around $1 per barrel, indicating tightness in the prompt month. However, potential oversupply in 2025 and fears of contango may complicate OPEC+’s plans to unwind production cuts. Although OPEC+ has curtailed crude supply, it has simultaneously increased product exports, which is impacting refinery margins. A credible plan for unwinding crude supply will need to address reductions in product exports as well.
China’s Impact on Global Oil Demand
In a separate analysis sent to Rigzone, Antonio Ernesto Di Giacomo, a Senior Market Analyst at XS.com, emphasized that China, as the world’s largest oil importer, plays a crucial role in the global energy market. Any shifts in its economy can significantly affect crude demand. Di Giacomo pointed out that recent deflation in China has raised concerns in international markets, hinting at weak economic growth and a possible decline in oil import needs.
Despite geopolitical tensions in the Middle East, particularly fears of escalating conflict between Israel and Iran, China’s economic data has been the primary focus for investors. Di Giacomo warned that low economic growth and insufficient fiscal stimulus in China have led to skepticism about its recovery, impacting global oil demand and crude prices.
As a result, the interplay between China’s economy and oil demand is becoming increasingly clear. Analysts are keeping a close watch on China’s economic decisions, as any sign of recovery or stagnation could directly affect oil prices. While tensions in the Middle East pose a risk to supply, it is China’s economic situation that appears to be influencing crude prices more immediately. Di Giacomo concluded that the evolution of China’s economy will be a vital factor to monitor, as changes in economic policy could soon impact oil demand and prices.
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