Oil Prices Are Set To Stabilise Amid Record Global Demand

(MENAFN- The Peninsula) The Peninsula

Doha, Qatar: The beginning of the Covid-pandemic in early 2020 marked the beginning of a period of significant bouts of volatility in commodity markets. For crude oil, in particular, major global events represented substantial shocks to markets, leading to extreme upward and downward swings in relatively short periods of time, Qatar National bank (QNB) said in its weekly report.

Initially, the Covid-pandemic represented a major negative shock to demand, given large-scale global lockdowns. This led to a temporary collapse in market conditions, as inventories were above full capacity whilst demand was at multi-decade lows. The price of Brent crude, the most relevant benchmark for global oil markets, bottomed at USD 19 per barrel mark in April 2020.

Thereafter, from the low in April 2020, crude oil prices experienced a remarkable turnaround. This was supported by a faster than expected post-pandemic global recovery, as well as active output management by OPEC+ member countries. The beginning of the Russo-Ukrainian war provided an additional boost, leading to a new spike that brought the Brent benchmark to USD 128 per barrel in March 2022.

After the peak, crude prices corrected significantly. On the demand side, given the slowdown in advanced economies, and the relatively moderate strength of the re-opening of economic activity in China from Zero-Covid policies. On the supply side, OPEC+ increased output to counterbalance the expected excess demand, while major economies (US, Europe, and China) managed emergency releases of strategic oil reserves. As a result, there was a correction in oil prices in 2023 to an average of USD 82 per barrel.

Importantly, supply and demand balanced, stabilizing prices around the annual average, which fluctuated between a low of USD 71 and a maximum of USD 94 per barrel. These are milder variations relative to the large swings in 2022, when prices had moved between a low of USD 75 and the peak of USD 128 per barrel. Moving forward, Brent prices are expected to remain supported at current levels around USD 80 per barrel. We discuss key factors that support our view.

First, on the demand side, the macroeconomic outlook for China, the rest of Emerging Asia (including India), and the US remains robust, which will boost growth in global oil consumption.

In China, although the post Covid-pandemic recovery was not as impressive as initially expected, growth remains firm. In its last World Economic Outlook, the IMF increased the 2024 growth forecast for China to 4.6 percent, from the previous 4.2 percent, reflecting new fiscal support from the government. Additionally, sustained expansion in the petrochemical industry, as well as jet fuel demand from expanding air transportation, will provide further backing in this economy. Expected growth of 6.5 percent for India and 4.7 percent for the ASEAN-5 economies (Indonesia, Malaysia, Philippines, Singapore, and Thailand) will also be key contributors to demand this year.

The US represents approximately 20 percent of world oil demand, and is therefore one of the key drivers of hydrocarbon markets that needs to be monitored.

The recent data releases showed that real GDP continued to expand at a healthy pace in the US, beating consensus expectations by a significant margin in the last two quarters of 2023. Consumption remains strong in the world's largest market due to firm labor demand and healthy household balance sheets. The likelihood of a recession, although not entirely discarded, has fallen considerably, and now the most likely scenario points to a“soft landing”. Taken together, these factors should be supportive for oil demand.

Second, on the supply side, the unexpected surge in volumes available at the market during 2023 is set to exhaust itself.

All in all, crude oil prices are expected to stabilize near current levels, as physical markets will tighten on the back of decelerating supply growth and still robust global demand. We therefore expect oil prices to fluctuate in a range close to USD 80 per barrel over the next few quarters, barring any significant surprises on the geopolitical front.

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