Skewed oil demand narrative makes calls for $90 crude questionable

Crude’s month-long rally, which propped up Brent futures by almost US $10/barrel to a nine-week high settlement of $87.43/barrel on July 4, split the market between bulls predicting $90 and sceptics saying seemed like a stretch.

One might be forgiven for questioning the existence of the latter, as bullish calls always get more air time. Pricier crude means costlier fuel for consumers and the media’s bad news bias is further amplified by market commentators happy to explain why the rising prices are justified, while contrarian viewpoints remain the unsung exception.

Some prominent Wall Street banks are permanent oil bulls and are quick to wheel out the tantalizing $100 forecasts each time crude goes into an upward spiral. Right or not, the market pays heed to their prophecies.

Then there is the world of energy equity investors, who also help drum up the narrative of higher oil prices, perhaps in the hope of boosting their portfolios and/or convictions.

This is by no means an outright dismissal of the prospect of the latest crude rally having legs but rather, a cautionary tale not to get caught in an echo chamber.

The key questions for most stakeholders is whether $90s would be a blip or sustained, and if the latter, what are the supporting factors for it to be the base case.

Summer’s seasonal oil demand bump, a largely US-Europe phenomenon, can indeed lead to depleted inventories and a backwardated structure in crude’s forward curve that rewards speculative longs, all working to prop up prices.

But this year’s summer demand narrative rests almost entirely on a strong start to holiday air travel supporting expectations of robust growth in jet fuel consumption. It has been ignoring the lacklustre performance of gasoline and diesel on either side of the Atlantic, which appears entrenched.

Global passenger demand measured in revenue passenger kilometres was up 15.4% year-on-year over January-May, according to the International Air Transport Association’s latest monthly data released in the first week of July. But jet fuel demand accounts for only about 7% of global oil consumption.

Gasoline demand in the US, the single biggest market for the product, came in 1.3% lower year-on-year at an average of 8.64 million b/d in the first four months of 2024, according to the latest monthly data from the country’s Energy Information Administration. The average in the four weeks to June 28 was down 1% versus a year ago. Diesel consumption in the US as well as Europe is taking a hit from a sustained months-long contraction in manufacturing, a tide which is also not expected to turn.

The bullish camp also appears to be ignoring the sustained sluggishness of Chinese oil demand, a country that forecasters of all stripes expect to contribute the lion’s share of global consumption growth this year. Optimism over a strong economic and oil demand rebound last year, as China dismantled nearly three years of strict Covid controls, proved misplaced, and it’s time to retire the exuberant sanguinity.

China’s estimated crude imports averaging 11.08 million b/d through the first half of this year were down from 11.38 million b/d in the corresponding period of 2023. Despite the drop, the country moved a considerable 790,000 b/d of crude into stockpiles during the period. China does not publish official domestic fuel demand data, but the crude imports and estimated stockpiling point to an anemic appetite.

Indian fuel demand came in 4.3% higher on-year at an average of around 5.27 million b/d in the first half. But the country is a distant third oil consumer behind the US and China, and in absolute terms, its increment translated to just 220,000 b/d.

Asia as a whole is seeing tepid consumption growth. The region’s average crude imports of 27.16 million b/d through the first half of the year were dwarfed by the 27.29 million b/d bought in the same period of 2023.

All-in, the big picture on the demand front does not support the case for crude to clamber into the $90s in the current quarter.

On the supply front, the OPEC/non-OPEC alliance is sticking to its current production target until the end of September, including the 2.2 million b/d “voluntary” additional cuts by eight of the group’s members, which are planned to be gradually unwound starting in October.

The wild card on the supply front is the ongoing Atlantic hurricane season, which is forecasted to be the most active the US has ever seen, with 4-7 major hurricanes. Beryl, which was poised to barrel through Texas after battering several Caribbean islands as a deadly Category 5 hurricane in the first week of July served an early reminder of the vulnerabilities of US crude and refined products supply. The US pumps about 1.8 million b/d of crude in the Gulf of Mexico, while the coastal states of Texas and Louisiana are home to about 8 million b/d of refining capacity.

A storm that knocks out substantial US Gulf oil production and/or refining capacity for a prolonged period of time could see crude spiking beyond $90. But such a situation is unlikely to be allowed to prevail, as it will inevitably prompt the release of strategic oil stocks from the US and other OECD countries to slam a lid on pump prices. That is especially true of an election year in the US.