Amidst the recent overall downturn in oil prices, OPEC's optimistic demand forecast has given the oil market a much-needed boost.
On September 24th local time, OPEC released its annual outlook report, raising its long-term global oil demand forecast. Due to increased oil demand in India, Africa, and the Middle East, coupled with a slowdown in the transition to electric vehicles and clean fuels, OPEC believes that oil demand will not peak by 2050.
Specifically, OPEC estimates that by 2045, global oil demand will reach 118.9 million barrels per day, about 2.9 million barrels per day higher than the forecast in last year's report. The report extends the forecast period to 2050, estimating that oil demand will reach 120.1 million barrels per day by then. In comparison, OPEC expects oil demand to reach 104.2 million barrels per day in 2024.
Senior oil industry economist Zhu Runmin analyzed for 21st Century Economic Report journalists that OPEC's upward revision of medium and long-term global oil demand, although the specific magnitude and duration may deviate from the actual situation, the prediction that oil demand in India, Africa, and the Middle East will increase is somewhat reasonable. The oil demand in developed countries and China may have already approached its peak, but other developing countries and low-income regions and countries will become the main sources of growth in oil consumption.
Regarding global energy transition plans, OPEC believes that some countries and companies may resist overly aggressive clean energy targets. Some global car manufacturers have also adjusted their electrification goals and reduced their investment in electric vehicles, which may also mean that the demand for oil will not decline as rapidly as previously predicted.
According to OPEC's forecast, by 2050, there will be 2.9 billion vehicles on the world's roads, an increase of 1.2 billion from 2023. Despite the rapid growth in the number of electric vehicles, by 2050, internal combustion engine-powered vehicles will still account for more than 70% of the total number of vehicles worldwide. "Electric vehicles are expected to capture a larger market share, but there are still obstacles, such as the power grid, battery manufacturing capacity, and access to critical minerals."
Zhu Runmin believes that electric vehicles and clean energy will first develop rapidly in developed countries and regions, some developing countries and regions, while less developed countries and regions will lag behind. This is determined by technological and economic strength. The energy demand in less developed countries and regions will still mainly rely on traditional energy sources, including oil. Throughout human history, the emergence of each new energy source has only supplemented the insufficiency of traditional energy sources in quantity and form, without significantly replacing the stock of traditional energy sources. By 2050, there may not be a breakthrough change.
Boosted by China's stimulus policies, OPEC's optimistic forecasts, and conflicts in the Middle East, on September 24th, oil prices climbed about 2%, reaching a three-week high. Brent crude futures rose by 1.7%, settling at $75.17 per barrel; U.S. crude futures rose by 1.7%, settling at $71.56 per barrel.
Is OPEC's forecast reliable?
Although OPEC expects that oil demand will not peak by 2050, the International Energy Agency (IEA) expects oil demand to peak before 2030.Why do OPEC and IEA forecasts differ so much? According to Li Jie, a senior researcher in energy and chemical futures at CCB Futures, IEA member countries are mostly major oil-consuming countries, while OPEC member countries are mainly oil-producing countries. The two sides have different positions, which can easily lead to disagreements on the judgment of oil demand. The IEA's forecast for demand is pessimistic, while OPEC is relatively optimistic. For example, in the May report this year, the IEA expected global oil demand to grow by 1.1 million barrels per day in 2024, with a growth rate forecast that is only half of OPEC's. In June this year, the IEA stated that by 2030, global oil supply is expected to exceed demand growth and push idle capacity to an unprecedented level, which may even overturn the current management of the international oil market by OPEC+. The next day, the OPEC Secretary-General issued a statement refuting this statement.
Echoing this, Zhu Runmin analyzed that OPEC and the International Energy Agency represent different interest groups in the oil industry chain. OPEC represents the supply side and will not actively admit that oil consumption has entered a downward channel; while the International Energy Agency mainly represents the interests of the demand side, it will try every means to control oil consumption demand, making the market realize that oil demand has entered a downward channel. On the one hand, it can drive the supply side to produce and consume quickly, giving up the idea of price increases; on the other hand, they are indeed actively working on energy transformation, actively reducing dependence on oil and other fossil fuels.
However, it needs to be recognized that the greater the disagreement, the greater the uncertainty in the oil industry. Zhu Runmin warned that if the current expectations for the future lead to a significant slowdown in oil investment, the decline in future oil supply will far exceed the decline in demand, and the world will once again face the continuous rise in international oil prices and a longer period of high operation.
Voluntary production reduction measures may continue to be extended.
In addition to the demand outlook, the market is also closely monitoring supply changes. In June this year, Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman decided to extend the voluntary production reduction measures of 2.2 million barrels per day until the end of September this year.
Due to the sharp drop in oil prices, on September 5, OPEC announced on its official website that eight countries agreed to extend the voluntary production reduction plan by two months until the end of November 2024, and the voluntary production reduction of 2.2 million barrels per day will be canceled from December 1 according to the new plan. However, OPEC added that participating countries can flexibly suspend or revoke these production adjustment decisions as needed.
In fact, OPEC is facing a dilemma. If it continues to reduce production, it may lose more market share; but if it does not take long-term actions to deal with global oversupply, oil prices will weaken further.
Whether OPEC+ will continue to extend voluntary production reduction measures in the future has become a focus of market attention. Citigroup analyst Anthony Yuen said that if OPEC+ cannot guarantee the indefinite extension of the current production reduction policy, the market may lose confidence in OPEC+'s defense of the oil price target of $70 per barrel.
The IEA expects that the outlook for the oil market next year will be weak, and even if OPEC+ abandons the plan to resume production, there will still be a supply surplus every quarter. In addition, with the surge in supply from the United States, Guyana, and Brazil, the IEA expects that the daily oil production of non-OPEC+ countries will increase by 1.5 million barrels next year, which is also unfavorable for oil prices.
Will OPEC cancel the voluntary production reduction of 2.2 million barrels per day on December 1? Zhu Runmin said that there is still uncertainty, and the main determining factor is still the international oil price. If the international oil price continues to fall, the possibility of continuing the voluntary production reduction is greater than the possibility of canceling it. In the scenario of a continuous decline in oil prices, if OPEC ignores the market supply and demand situation and cancels the voluntary production reduction, it means a new market share battle, and the price war will start again.Overall, the duration of OPEC+ production cuts depends on the extent of understanding the supply and demand conditions in the global oil market. Zhu Runmin analyzed that if OPEC+ believes that the market is still under control, they will adjust policies in an orderly manner according to changes in international crude oil prices and market supply and demand conditions, and unanimously extend until they believe the market has digested their surplus production capacity. If they believe they can no longer control the market supply and demand conditions, it is only a matter of time before a price war breaks out.
There is limited downside potential for oil prices.
After a sharp decline earlier in September, international oil prices have rebounded recently, and OPEC+ will continue to be an important support force in the oil market.
Li Jie analyzed to the reporter that Saudi Arabia has a strong demand for oil prices, with the fiscal break-even oil price reaching $96 per barrel in 2024, the highest level in recent years. At present, the United States does not have the ability to significantly increase production, and OPEC+ can still support oil prices through active production cuts. Therefore, if oil prices experience a significant decline in December, Saudi Arabia is likely to reduce production on its own again or jointly control supply with other member countries.
The fundamentals of the crude oil market have not deteriorated significantly, and eight OPEC+ member countries have postponed the resumption of production by two months, which will further tighten supply. If oil prices continue to decline, Saudi Arabia may introduce production reduction policies again. In the current market environment, Saudi Arabia's main idea is still to sacrifice market share to ensure oil prices. The latest monthly reports from the three major institutions have not significantly reduced demand, and the fourth quarter will shift from a tight balance to a slight supply shortage. Li Jie expects oil prices to fluctuate, with limited downside potential.
In Zhu Runmin's view, the current price level is still within the acceptable range of OPEC+. Unless there is a significant event that causes a major change in the supply or demand side, it is worth looking forward to the international oil price range in 2024 for the next period (within 2 years), and $60-90 per barrel is an acceptable price range.
Xi Jianrui, a crude oil analyst at Jinlian Chuang, analyzed to the 21st Century Economic Report reporter that although the Federal Reserve's first round of interest rate cuts exceeded expectations, the oil market had already digested this factor in advance, so the boost to the oil market was limited, and concerns about the global economy became the main reason for suppressing the oil market. However, China is introducing active economic stimulus policies, which may provide some support for the oil market. Overall, international oil prices may fluctuate as the market weighs the economy and policies, and it is expected that the mainstream operating range for WTI crude oil will be $69-73 per barrel, and the mainstream operating range for Brent crude oil will be $73-77 per barrel.
At a time when bullish and bearish factors are intertwined, some institutions on Wall Street still have a positive outlook for the oil market. Bank of America analyzed that due to investors' concerns about OPEC+ increasing supply and the potential sluggish growth of global oil demand, the short positions in the recent oil market have approached a record level. However, if global GDP grows as expected, energy demand may also grow. With the Federal Reserve's interest rate cuts, loose policies may help "significantly boost" the world economy in the next few quarters.
In addition, the artificial intelligence revolution may bring new demand to the global oil market. Bank of America believes that the outlook for oil prices may be more optimistic than many bears expect. With artificial intelligence-driven data center demand becoming a part of the next "productivity revolution," it is expected that the growth rate of US electricity demand will increase from 0.2% to 2% over the next seven years.