What do softer fundamentals mean for the oil market? Via Investing.com

Investing.com — BofA Securities analysts in a note dated August 16 signaled that the global market is navigating a complex landscape marked by diverging supply and demand trends, geopolitical uncertainties and evolving macroeconomic conditions. The note mentions the fundamental factors influencing oil prices, focusing on the interplay between supply growth, demand dynamics, geopolitical risks and macroeconomic influences.

The dynamics of supply and demand

Supply overview:

• Non-OPEC+ production growth: Non-OPEC+ oil production is expected to rise significantly, with an estimated increase of around 1 million barrels per day (b/d) year-on-year (YoY) in 2024 and 1.6 million b/d YoY in 2025. to this growth include Brazil, Guyana, Canada and the United States.

• OPEC+ adjustments: OPEC+ plans to reintroduce some barrels to the market in the fourth quarter of 2024. This adjustment aims to manage the balance between supply and demand and reduce current production cuts from around 6.7 million b/d to around 4.25 million b/d /day. the end of 2025.

Application overview:

• Decrease in growth rate: Growth in global oil demand is expected to slow considerably. “However, oil demand growth is slowing significantly as electric vehicle penetration rates increase in China and elsewhere, so we see global oil demand increasing by an average of 1 million b/d in 2024 and 1.1 million b/d in 2025,” the analysts said.

• Sector-specific trends: Despite overall moderation in growth, demand for specific products such as jet fuel, diesel and petrochemical feedstocks remains robust.

Price perspective

Price forecast:

• Average prices: prices are forecast to average $86/barrel (bbl) in 2024 and $80/bbl in 2025, with WTI prices following a similar trend of $81/bbl in 2024 and $75/bbl in 2025.

• Surplus conditions: The global oil market is expected to face a surplus of 700,000 b/d in 2025, driven by accelerating non-OPEC supply and slowing demand growth.

Inventory Implications:

• Commercial and strategic inventories: The expected surplus may lead to a substantial increase in both commercial and strategic oil stocks. This build-up could be significant, potentially restoring depleted strategic reserves in 2022.

Geopolitical and macroeconomic influences

Geopolitical risks:

• Tensions in the Middle East: Geopolitical instability, particularly in the Middle East, poses a significant risk to oil prices. Events such as military confrontations or attacks on energy infrastructure could lead to substantial price increases.

• Infrastructure vulnerability: Increasing attacks on energy infrastructure in recent years, including in Ukraine and the Middle East, increase the risk of supply disruptions.

Macroeconomic factors:

• US interest rates and the US dollar: The report predicts a decline in US interest rates and a weaker dollar in 2025. This macroeconomic environment is likely to support oil prices as a weaker dollar makes oil more affordable in other currencies.

• Stimulus from China: Anticipated economic stimulus in China could provide further support to oil prices by boosting industrial and construction activity.

Potential downside risks:

• Trade rates and policies: The increase in tariffs, especially in the context of the results of the US presidential election, could have a negative impact on emerging markets (EM) and global commodity demand. This scenario could dampen oil demand growth by as much as 500,000 b/d in 2025 and flatten the Brent crude curve.

Comparative analysis

Historical energy prices:

• Current Ratings: Energy prices, including oil, are relatively cheap compared to historical levels, especially when adjusted for inflation. This assessment supports a floor for prices despite current market pressures.

Long-term price trends:

• Price anchoring: Long-term Brent crude oil prices have remained relatively stable, averaging around $70/bbl in recent years. This stability suggests that while spot prices may experience volatility, long-term prices are expected to be well supported.