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Thought of the day

The price of Brent crude fell by 4.2% on Tuesday to around USD 81.5 a barrel, marking the first time the benchmark has closed beneath its level prior to Hamas’s attack on Israel. Oil is now down around 6.5% so far in November, following an 8.3% decline in October. The latest fall came after the US government forecast a decline in the nation’s oil consumption this year, based on calculations by the Energy Information Administration. Investors also appear to have become less concerned that the Israel-Hamas war may draw in other Middle East nations, with the potential to disrupt oil supplies.

But we expect oil to move back up toward between USD 90 and USD 100 a barrel, amid still rising global demand and tight supplies.

Global consumption of crude remains well supported, despite the weaker official forecast from the US. The US Energy Information Administration now expects the nation’s total petroleum consumption to fall by 300,000 barrels per day in 2023, having previously expected an increase of 100,000 bpd. However, elsewhere there are positive signs on demand. China, the world’s largest global importer, has stepped up stimulus measures—with stronger growth likely to boost energy demand. In October, China’s crude imports were up 13.5% on the prior year, and 3.6% on the month. Oil consumption in India is also rising. Moving into next year, the latest forecast from OPEC, the group of oil-exporting nations, is for demand to grow by more than 2 million barrels per day in 2024. The International Energy Agency is forecasting growth of 800,000 barrels a day.

Key oil producers have remained disciplined on production, keeping supply tight. Saudi Arabia and Russia recently announced that their voluntary extra supply cuts will be kept in place for December. Saudi Arabia is curbing its production again by an extra 1mbpd, and Russia is reducing its crude exports by 0.3mbpd. Statements from both countries said the cuts will be reviewed next month to decide whether they should be extended, deepened, or reduced—depending on market conditions. We believe these voluntary supply cuts are likely to be extended into the first quarter of next year—given seasonally weaker oil demand at the start of every year, ongoing economic growth concerns, and the aim of producers and OPEC+ to support the oil market’s stability and balance. The next meeting of OPEC nations is on 26 November.

The risk of a disruption to oil production arising from the Israel-Hamas war has not gone away. Our base case is that the conflict will not escalate. However, events in the region remain fluid. The clearest threat is to Iranian output. Should Iranian crude exports fall by around 300,000–500,000 barrels per day, this could further constrain the already undersupplied market, potentially pushing Brent prices up to USD 100–110/bbl. While OPEC+ has sufficient spare capacity to compensate for such a reduction in supplies, any measures could take time to calm markets. A broadening of the conflict across the region that pulled in other oil-producing countries could cause prices to rise even more, depending on the magnitude of the disruption. Against this backdrop, oil retains a hedging value in portfolios.

So, we expect oil to rise after the recent period of weakness. We continue to recommend risk-taking investors add long exposure via longer-dated Brent contracts, which are trading at a discount to spot prices, or to sell Brent’s downside price risks.