As crude oil climbs back above $80 per barrel, we see very different global demand outlooks that will affect fuel prices during the growing season.
The Organization of Petroleum Exporting Countries and its associates, known as OPEC+, see strong demand growth that would push prices higher, but other forecasters are more reserved.
The West Texas Intermediate benchmark was mostly above US$80 per barrel last week, a level not seen since early November last year.
It was mostly in the $70 to $78 range through the winter, much less than was expected in forecasts issued last fall.
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We are unlikely to see a return to those lower levels for the rest of this year.
The run up since early March was linked to OPEC+ deciding to continue its production cuts through to at least the end of the second quarter and possibly to the end of the year.
Also, global demand is a little higher than forecasted, thanks to stronger than expected economic growth in the United States and the fact that many ships are using more fuel sailing around the horn of Africa as they avoid the Suez Canal/Red Sea route because of attacks by Houthi militants.
And in recent days, Ukraine’s missiles have damaged Russian refineries.
The U.S. government’s Energy Information Administration on March 12 forecast WTI crude to average $83.30 in the April to June quarter of this year, rising to $84.50 in the July-September quarter and then easing to $83.50 in the final quarter.
That would put prices this summer at a similar level to last summer.
Whether that forecast proves correct depends a lot on how demand grows.
Last year, demand rose by an aggressive 2.3 million barrels per day, roaring back from COVID restrictions, according to the Paris-based International Energy Agency.
In March, the IEA forecast world oil demand in the current year rising by a more conservative 1.3 million bpd, but that was 110,000 barrels higher than its forecast in February.
However, OPEC is much more bullish on demand, expecting it to climb by 2.25 million bpd this year.
OPEC is more upbeat about world economic growth than the IEA. Also, the IEA’s forecast for the dampening effect of electric vehicle sales on gasoline demand is larger than OPEC’s.
The reputation of IEA’s forecasts was tarnished in 2023 when it began the year with a growth forecast of only 1.9 million bpd but had to keep increasing it through the year as demand outpaced its expectation, finally rising to 2.3 million, which is where OPEC forecasted it as early as March.
If the IEA has done a better job this year and its forecast proves correct, then the global supply-demand situation should be fairly stable. But remember, it already increased its forecast this year by 110,000 bpd compared to February.
While OPEC continues to limit its members’ production, output is growing elsewhere.
IEA sees non-OPEC production rising by 1.6 million bpd, led by the U.S., Canada, Guyana and Brazil.
Remember, the Trans Mountain Pipeline expansion is mostly complete and should be operating by summer. This will ultimately, at full capacity, add about 500,000 bpd of Canadian exports, considering that oil producers have already expanded production capacity in expectation of the pipeline’s opening.
Bloomberg news reported that a large Asian petrochemical company has booked a cargo for loading in June.
I already noted the U.S. EIA’s forecast for the North American benchmark WTI prices, but it also forecasts the international benchmark Brent price, which is usually around $5 higher than WTI.
EIA sees Brent at $87.97 in the second quarter, $89 in the third and $88 in the fourth.
Some major investment banks have similar forecasts.
Goldman Sachs sees the Brent price averaging $87 this summer.
Morgan Stanley is in the same ballpark with a forecast of $90 for the third quarter.
However, Citigroup analysts are less bullish, seeing third quarter Brent at only $74.
So who is right in these demand forecasts? Much depends on China.
Its economy has been struggling with a huge real estate bubble that has burst, poor consumer confidence and high unemployment, especially among young people.
Its government has introduced stimulus measures, and some economic reports show improvements in the early months of this year.
The government has set an economic growth target of five percent for this year, which many believe will be difficult to meet.
Oil forecasts can also be tripped up by the unexpected, such as the decision by the Houthis in Yemen to start targeting ships transiting the Red Sea, resulting in many ships rerouting to the long voyage around Africa.
Another potential wild card is the Ukraine-Russia war, which has gotten hotter in recent weeks with increased missile attacks on each other’s energy infrastructure. Russia has targeted Ukraine’s electrical grid, while Ukraine has attacked several Russian oil refineries.
