Oil Little Changed: Demand Weakness Offsets Sanctions-Driven Supply Risks
Wednesday, Dec 11, 2024 9:39 pm ET
KB --
Oil prices remained relatively stable in recent weeks, with demand weakness counteracting supply risks stemming from sanctions against Russia. The global oil market has been navigating a delicate balance between these opposing forces, as geopolitical tensions and economic factors shape the market dynamics.
The Brent crude oil spot price averaged $74 per barrel (b) in September, down $6/b from August. Prices fell as concerns over global oil demand growth outweighed declines in oil inventories and OPEC+ members' decision to delay production increases until December 2024. However, after recent military actions involving Israel, Lebanon, and Iran, the Brent spot price rose to $79/b on October 4, up 11% from a week earlier. The potential for further escalation has injected significant uncertainty and volatility into oil markets.
Following the September drop in prices and our expectation that oil demand growth will be lower next year than previously forecast, we have lowered our forecast for crude oil prices. We now expect Brent to average $78/b in 2025, $7/b less than our forecast from last month. Despite increasing oil prices in early October, the overall outlook for crude oil prices remains cautious.
No oil supplies have been affected by increased military action in the Middle East at the time of STEO publication, and we do not assume any disruption in our forecast. However, the conflict has escalated in recent weeks with no timeline for a potential resolution, increasing the possibility for supply disruptions and price volatility. At the same time, we assess that significant surplus crude oil production capacity is available, which could be brought online in the event of a disruption.
OPEC+ production cuts continue to mean less oil is being produced globally than is being consumed, and oil is being withdrawn from inventories. We estimate that global oil inventories fell by 0.8 million barrels per day (b/d) in the third quarter of 2024 (3Q24), and we expect inventories will fall by 0.6 million b/d through 1Q25. As a result, we expect Brent prices will rise from $74/b in September to average $79/b in 1H25, which is about $6/b lower than in last month's STEO.
By the middle of next year, we anticipate accelerated growth in oil production as OPEC+ increases its production and as production continues to grow in the United States, Guyana, Brazil, and Canada. We forecast oil inventories will increase by an average of almost 0.6 million b/d in 2H25 as production growth globally begins to outweigh global oil demand growth.
In addition to the escalating Middle East conflict, other sources of uncertainty remain. We now expect production in Libya will begin increasing in the coming weeks, following recent production outages. But production in Libya can be volatile, and returning crude oil production volumes might fall short of our expectations. We also assess that OPEC+ producers are likely to continue to limit production below recently announced targets in 2025. However, if OPEC+ producers stick closely to announced production levels in 2H25, it would be a downside risk to oil prices.

Global oil production and consumption are expected to remain in balance, with production growth outside of OPEC+ remaining strong over the forecast period. As a result, we anticipate OPEC+ producers will likely keep production less than their recently announced targets for much of next year.
We expect that global production of petroleum and other liquid fuels will increase by 2.0 million b/d in 2025, up from growth of just 0.5 million b/d this year. We assume countries outside of OPEC+ increase production by 1.4 million b/d next year, while OPEC+ production increases by 0.7 million b/d, after the voluntary cuts reduced OPEC+ production by 1.3 million b/d this year.
In addition to voluntary cuts to OPEC+ production, a force majeure in Libya in August and September reduced oil production. We estimate Libya's crude oil production fell to 0.4 million b/d in September 2024 from nearly 1.2 million b/d in July 2024 before the disruptions began. As of early October, it appears the cause of the disruption has come to a resolution, with affected production potentially restarting in October. We assume Libya's oil production will average 0.6 million b/d for the rest of this year.
We revised our estimate of Iraq's crude oil production, including historical production, up by an average of 0.2 million b/d in 2024 to account for our assessment that more crude oil is being used in new refining capacity in Iraq than we had previously determined. Although we raised our assessment of Iraq's oil production, we still estimate that Iraq cut its crude oil production by 0.3 million b/d from July through September 2024.
Global economic growth projections significantly impact oil demand and prices. As the IEA reports, world oil demand is forecast to expand by 920 kb/d this year and just shy of 1 mb/d in 2025, reflecting below-par global economic conditions and the end of post-pandemic pent-up demand. Slower growth in China, the main drag on demand, is expected to average just a tenth of the 1.4 mb/d increase in 2023. Meanwhile, oil supply is rising at a healthy clip, with the United States leading non-OPEC+ supply growth of 1.5 mb/d in both 2024 and 2025. However, OPEC+ delayed the unwinding of extra voluntary production cuts, further influencing oil prices.
Shifts in consumer behavior, particularly the adoption of electric vehicles (EVs), are significantly influencing long-term oil demand and pricing. As of 2024, global oil demand is forecast to expand by 920 kb/d, a slowdown from recent years, reflecting the end of post-pandemic pent-up demand and below-par global economic conditions (IEA, 2024). The deployment of clean energy technologies, including EVs, is increasingly displacing oil in transport and power generation, adding downward pressure to otherwise weak demand drivers (IEA, 2024). For instance, China's marked slowdown in oil demand growth, averaging just a tenth of the 1.4 mb/d increase in 2023, is largely attributed to the rapid adoption of EVs (IEA, 2024). As EV adoption continues to rise, driven by factors such as government incentives, technological advancements, and environmental concerns, long-term oil demand is expected to decline, impacting oil pricing in the long run.
In conclusion, the global oil market is currently in a state of equilibrium, with demand weakness offsetting sanctions-driven supply risks. Geopolitical tensions and economic factors continue to shape the market dynamics, and the future outlook remains uncertain. As the market navigates these opposing forces, investors and stakeholders must remain vigilant and adapt to the evolving landscape to capitalize on opportunities and mitigate risks.