Crude View : Recent changes in the global oil market have sent Brent crude oil prices tumbling down, forcing them to their lowest levels since December 2021. In the latest trading, Brent crude changed hands at about $71 per barrel. This is a result of ample supplies and weaker prospects for demand, both of which have exerted downward pressures. The current market dynamics are hugely different considering the rising inventories of fuel, lower refining margins, and changes in the supply-demand balance.
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Implications of Ample Supply and Weaker Demand
The global oil market is currently in a spell of demand weakness characteristic of periods leading to economic recessions. This, among other things, has contributed to major financial institutions like Morgan Stanley revising their forecasts for Brent crude oil prices for the coming quarters. In this respect, the investment bank observed that supply conditions at the moment somewhat mirrored demand-supply scenarios recorded earlier in history when demand was weak, such as the financial crisis of 2007-2008 and the emergence of the COVID-19 pandemic in 2020.
Historically, during economic contractions, demand for oil typically contracts, creating a supply overhang that weighs on prices. Morgan Stanley said the situation was no different now, as it sees supplies building and refining margins sliding, indicating weak demand. These factors taken together, combined with current price spreads-the difference between the current price and future price of oil-suggest that the market is pricing in a significant deterioration in the balance of supply and demand.
Crude View : The Role of OPEC+ in Stabilizing the Market
These developments have culminated in an attempt to supply-side manage the equation by the Organization of the Petroleum Exporting Countries and its allies, popularly known as OPEC+. The latter has been keeping their fingers on the pulse of the market-their latest move being to delay the planned increase in production due to start this October. This is a sign that the group is keen to balance the market and avoid a further slump in oil prices.
OPEC+ has long been taking care of the stabilization of oil supplies. The production cuts have often been used by the group during periods of oversupply to prop up prices, while opening up taps when supplies are scarce in order to avoid prices getting too high. This further delay in the production increase marks an indication that OPEC+ is well-apprehensive of running the risk of over-flooding the market with additional supplies at a time when demand is weakening. In this respect, by not making higher increases in production, OPEC+ intends to keep the supply and demand balance tighter in hopes of avoiding further declines in prices.
Revised Oil Price Forecasts by Morgan Stanley
Morgan Stanley has revised its Brent crude oil price estimates for the upcoming quarters, considering the prevailing market conditions. The investment bank now sees Brent at around $75 per barrel for all of 2024, from an earlier estimate of $78 per barrel during the first quarter of 2025. This revision is considering the bank’s perception of a “cyclical period of demand weakness” going on in the market at the moment-a similar occurrence witnessed during previous recessions.
Morgan Stanley’s revised forecast also showed the oil market would still be tight in the third quarter of 2024, move closer to a balanced state in the fourth quarter, and probably show a surplus of around 1 million barrels per day by 2025. This is based on anticipation of both OPEC and non-OPEC sources ramping up their production in the latter part of 2024 and into 2025 and shifting the supply-demand balance.
Contributory Factors to Low Demand
The demand weakness currently affects the oil market for a number of reasons. Among these, the economic slowdown in different parts of the world stands out as one of the main drivers. In the case of many countries, economic growth has been slow and, in some instances, has even raised the risk of recession. As a consequence of the slowdown in economic activity, oil consumption was directly hit because industrial production, transportation, and other oil-intensive activities decreased.
Another factor has been the shift towards renewable energy sources and the gradual move to a low-carbon economy. With governments and companies across the world pledging toward lessening carbon footprints, there has been an increasing focus on alternative forms of energy sources such as wind, solar, and electric vehicles. All this has gradually brought down demand for fossil fuels like oil, hence pressuring prices further.
Beyond that, the aftermath of the COVID-19 pandemic continued to depress oil demand around the world. Though the pandemic has largely passed, its economic effects have remained. Many industries, especially those to do with traveling and tourist industries, have not returned fully to the levels experienced before the pandemic. This incomplete recovery dampened the rebound in oil demand and added to the current period of weakness.
Impact on Upstream Earnings and Future Outlook
Current low oil prices are taking their toll on the earnings of upstream companies, that usually benefit at higher oil prices because they can sell their output at a premium. With the Brent currently pegged at single $71 per barrel, its impact is viewed as dismal for upstream earnings.
There is even hope, as prospects still look gloomy, for the near-term recovery of oil prices. Other analysts, such as those at Morgan Stanley, estimated that Brent may recover to $75-80 per barrel. The rebound will likely occur assuming that OPEC+ continues with good management of supply and demand will gradually improve once economic conditions stabilize.
Besides the expected rebound in oil prices, there are other factors that bode well for upstream players. For instance, APM gas is expected to increase in FY26E, benefiting companies involved in gas production. Moreover, gas produced from new wells is likely to attract premium pricing, further enhancing the earnings potential for upstream companies.
Seasonal Demand and Future Supply Dynamics
Seasonal demand patterns are another critical determinant of the structure of the oil market. Oil demand is usually higher during summer due to increased travel activity and the greater use of air conditioners. However, this seasonal demand strength tends to dissipate once summer ends, with a subsequent decline in overall demand levels.
Looking ahead, supply is expected to re-accelerate in the fourth quarter of 2024 and in 2025. OPEC and non-OPEC will likely produce more in that period, possibly shifting the balance of supply to demand. If supply growth outpaces that of demand, the market may go into oversupply, which would put additional downward pressure on prices.
Yet again, one has to consider that OPEC+ is very keen on sustaining market equilibrium. The bottom will fall out of that procrastination, as taken from the recent decision by the group to delay increases in production, as it was entirely dedicated to avoiding an oversupply situation. This means that while supplies are likely to grow, it’s expected that OPEC+ manages the process carefully so as not to disrupt the market.
The Role of Oil Price as Recessionary Indicator
Given the prevailing market conditions, Morgan Stanley used the prices of oil as an indication of recession. Previous sharp declines in the price of oil have either preceded or coincided with recessions. This is because during recessions, the demand for oil normally falls sharply due to a decline in economic activities.
The investment bank said this recent plunge in the price of oil does contain some features similar to recessionary periods of the past. For example, the spread between current and future oil prices and current inventories of fuel are typical of those in periods of weak demand in the past. But Morgan Stanley pointed out that it was too early to conclude beyond doubt that the current oil price slump was a precursor to a recession.
Instead, the bank said the market is pricing in a significant deterioration in the balance of supply and demand, rather than an outright recession. Unless demand weakens further, Morgan Stanley expects Brent prices to remain anchored around the mid-$70s a barrel.
Conclusion: How to Move Safely in Uncertain Oil Market
The current oil market represents a very complex interaction between supply and demand. While plentiful supplies and weak prospects for demand have brought the price of Brent oil to its lowest since December 2021, the rebound in the near term still offers some promise. OPEC+’s actions to delay production increases and manage supply cautiously would signal that it is still committed to stabilization.
In fact, revised estimates by Morgan Stanley already suggest that the price of oil, though remaining weak for a little while longer, is likely to stabilize at US$75 per barrel in the near term. A possible rebound in prices, combined with increasing APM prices and premium pricing for gas from new wells, does hint at upside potential for upstream players to improve their earnings.
With the market still skittish about any fluctuation in economic fortunes, further weakness in demand cannot be ruled out. Investors and industry participants will need to monitor world economic and oil market developments closely for at least the next couple of years as they make their way through uncertainty. The fact that the price of oil is a potential recessionary indicator makes it even more complex, and judiciousness in analysis and strategic decision-making is apt in such a volatile environment.