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Oil’s dual dilemma – supply is growing, but China’s slowing

It has the makings of a jigsaw puzzle. And the oil market for now is saddled with more questions than answers amid efforts to solve it.

For more than 1,000 delegates who attended the Asia Pacific Petroleum Conference — or APPEC 2024 — one of the biggest themes that occupied the spotlight was how the world’s oil producers can strategize to maintain market share, as well as ensure higher prices, at a time when appetite of one of the world’s leading consumers, China, is close to hitting the ceiling.

While a few voices offered a bullish perspective, it seemed clear at APPEC that a majority of speakers and attendees see relatively weak oil demand growth ahead. That contrasts sharply with forecasts for a steady growth in supply — a scenario that is set to create an unending dilemma for OPEC+.

There was intense debate on the issue, with delegates saying that it was tough to visualize how OPEC+ can bring production back without creating more downward pressure on flat prices — possibly even a sustained and meaningful contango in the forward markets — which would, in turn, support deeper stockpiling.

The big takeaway for OPEC+ is that it might be possible to protect the price by not bringing production back. Alternatively, it might be possible to protect unity among the members by increasing the production quotas. But they were unanimous in their view that it seems increasingly difficult to find a path to do both at the same time.

According to S&P Global Commodity Insights, OPEC and its allies’ decision on Sept. 5 to extend its voluntary production cuts for two months until the end of November was largely seen as neutral for oil, but short-term fundamentals certainly remain bearish.

The planned 190,000 b/d hike for October is now set to be a 189,000 b/d hike for December, while the additional 173,000 b/d hike for November is now set to be a sequential 207,000 b/d increase for January. An increase of 2.5 million b/d would significantly increase the risk of a price collapse, which is why Commodity Insights expects the actual increase to be much lower than the originally numbers outlined in June.

OPEC has maintained its forecast for supply growth outside OPEC+, which has been a key factor in falling prices in 2024. It sees non-OPEC+ supply growth at 1.2 million b/d in 2024, averaging 53.1 million b/d, and a growth of 1.1 million b/d in 2025, averaging 54.2 million b/d. The bulk of this growth will come from the US, which is expected to produce 510,000 b/d more liquids in 2024 and add another 500,000 b/d in 2025.

China overshadows other themes

Most analysts during APPEC were busy revising down China’s oil demand growth forecast for the near to medium term.

According to Commodity Insights, China’s oil demand growth forecast is likely to be reduced to around 200,000 b/d for 2024, which would be much lower than the previous expectation of 380,000 b/d. But some improvement is expected in 2025. Electrification of transportation, growing usage of LNG trucks, a muted response to stimulus measures, delays to petrochemicals projects, cool and wet weather, as well as a troubled property sector are all taking a toll on consumption.

Looking at the current supply-demand equation, speakers at APPEC were of the view that oil prices are surely not staring at a “boom,” but a “bust” is also not near. They were quick to highlight that although oil prices may not be heading higher anytime soon as the US economy — in addition to China — was facing demand pressures, a robust outlook in some other demand centers, such as India, could provide a floor to the market and prevent a price crash.

Commodity Insights expects Platts Dated Brent to average around $77/b in 2025, down from $83/b on average so far this year.

The discussions on China’s slowing appetite clearly overshadowed concerns around geopolitics as delegates said that regardless of the geopolitical conflicts involving Russia, Ukraine, Iran and Israel, in addition to numerous international sanctions, there were no significant crude supply bottlenecks and hardly any major disruption to physical trade flows.

But there were some silver linings to the Asia oil story. APPEC delegates were of the view that despite dark clouds looming over China’s demand outlook, the overall outlook — from a refinery expansion perspective — was still intact.

While India, China and some countries in Southeast Asia will continue to expand refining capacity, there was a need for refiners to tilt their strategy in favor of petrochemicals amid expectations that electric vehicles will continue to take a toll on consumption of transport fuels.

Many refiners in China have plans to add more than 1 million b/d capacity each in the near term, although they might have to operate at much lower utilization rates. Southeast Asia would continue to offer promising growth prospects for oil in the near term. Japan, on the other hand, is adopting a different route. With demand for oil products falling, Japanese refiners are trying to ensure that domestic refining margins remain relatively healthy by gradually reducing capacity.

Challenges ahead

Delegates and speakers at APPEC also pointed out that refinery expansion as well as new projects were facing a lot of challenges in terms of getting funding from banks. While Indian and Chinese national oil companies have the muscle power to expand, Southeast Asian refiners — which would benefit from collaboration with some Middle Eastern producers — were struggling to find partners.

And in the upstream side, there was a big scramble for discovered oil and gas assets in developing countries. Efforts were mounting to put them into production as early as possible, as the energy transition gathers momentum and western companies continue to rationalize their portfolios and divest assets in Asia.

This year at APPEC, there were also louder appeals for government intervention in next-generation fuel markets in terms of clearer policy guidance, subsidies as well as government investments. There is no doubt a big appetite for progress in hydrogen, ammonia and renewable power. But returns on those investments are meager and it was getting increasingly challenging for the private sector to drive those projects alone. Weaker oil prices can only exaggerate those pressures.
Source: Platts

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