Might Crude Oil Hit US$100/bbl Again?

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Analysts assess the near term outlook for oil and gas prices amidst a variety of risks and uncertainties.

-Global demand/supply
-OPEC’s balancing act
-Emerging market demand
-Geopolitical Risks
-Australian gas prices

By Greg Peel

The International Energy Agency (IEA) has revised down its global oil demand growth forecast by -140,000 barrels per day to 1.1mb/d in 2024, on the back of lower OECD demand in the March quarter. However, global oil demand growth in 2025 has been revised slightly higher to 1.2mb/d.

The IEA projects global supply to be at a record of 102.7mb/d in 2024, led by non-OPEC-Plus countries, with supply growth by non-OPEC-Plus to be at 1.4mb/d in 2024, while OPEC-Plus voluntary cuts would lower supply growth by -0.8mb/d.

The US Energy Information Agency (EIA), in its latest Short-Term Energy Outlook, projected a smaller deficit of less than -0.1mb/d in 2024 and a surplus of nearly 0.4mb/d in 2025. The agency now expects OPEC-Plus production cuts could potentially be rolled forward for the whole of the second half of this year. The agency left global oil demand growth unchanged at 0.9mb/d in 2024 and at 1.4mb/d in 2025.

Ahead of the June 1st OPEC meeting, the IEA and EIA converged to Citi’s long-standing view, expressed last December, on extending voluntary cuts till the end of 2024. All in all, once incorporating EIA’s OPEC crude production numbers, Citi has a deficit of -0.5mb/d in 2024, loosening to a surplus of 0.3mb/d in 2025.

While May saw another month of downgrades to global 2024 demand growth estimates by the IEA and EIA, the IEA’s change was the result of raising the 2023 demand baseline by 130kb/d without a corresponding adjustment to 2024, notes Morgan Stanley, thereby compressing growth in 2024. The IEA cited weaker demand data from Europe in the March quarter.

The Balancing Act

OPEC faces a difficult decision, suggest ANZ Bank analysts, as it meets to review its supply policy next month. ANZ believes market expectations will surpass fundamentals, as OPEC looks to provide some stability for the oil market.

There are three possible outcomes: extend the current voluntary production cuts of -2.2mb/d; unwind them; or completely remove them. ANZ’s current model is based on a gradual unwinding of the cuts in the second half of this year.

This is the basis for ANZ’s Brent oil forecast of US$90/bbl in the second half. Should OPEC choose to remove the cuts, prices could fall as low as US$75/bbl. However, an extension could produce “eye-watering deficits” and push prices to US$100/bbl. ANZ’s estimates don’t take into consideration any geopolitical risk premium.

As such, ANZ Bank sees an extension is the most likely outcome. A possible middle ground could be the adjustment to members’ baseline production levels if the group decides an official unwinding of production cuts is too risky for prices.

Longview Economics notes oil prices have fallen -11% from their April 12 high. In the short term, Longview’s models point to further downside in the short term.

On a one to two-year view, Longview suggests the oil price outlook is bullish, with Brent likely to rally to US$90-100/bbl by year-end. That view reflects the analysts’ outlook for global oil inventories, which they expect to trend down over the next 18-24 months as a result of modest supply deficits this year and next.

In particular, OPEC-Plus production is likely to stay relatively low this year, Longview believes, while US shale oil supply growth should continue to decelerate, only growing by 0.6mbpd this year and next year versus 1.5mbpd last year.

Global oil demand growth should remain robust, albeit at a lower level versus 2022 and 2023.

Emerging Demand

Trend growth in developed market oil demand is close to, if not at, zero, Longview Economics notes. Total DM oil consumption hasn’t grown for about 40 years, given a combination of relatively low population growth compared to emerging market economies, and the multi-decade downtrend in oil consumption per head, as Western nations have become more efficient with their energy use and, in recent years, have switched towards EVs.

Emerging market oil demand is therefore the key marginal driver of global demand. Without EM, global oil demand wouldn’t have grown in the past 40 years. With EM, it has grown cumulatively by 70% since 1985. Chinese demand has been a key component of that growth, especially in recent years. In the next 18 months though, Chinese demand is likely to slow, Longview believes.

But how much will EM demand, outside of China, drive global oil consumption growth this year and next?

EM demand growth ex-China is likely to pick up in the next 1-2 years, Longview suggests, given the likely acceleration in EM population growth (the key driver of global population growth) coupled with rising oil demand intensity and rapid/ongoing growth in (non-EV) vehicle ownership in key EM ex-China economies.

EM economies ex-China should therefore account for most (around 60%) of the growth in global oil demand this year and next.

In India in particular, vehicle ownership has increased from 13% in 2015 to over 25% last year. That translates to some 160m new vehicles on the road in that time (with global vehicle ownership up 650m). In other words, India accounted for around 25% of the increase in vehicles on the road globally.

In Brazil, vehicle ownership has increased from 35% to 50% (30m vehicles), in Indonesia from 20% to 40% (60m), and in Vietnam from 5% to 20% (15m). In 2023, less than 5% of new motor vehicle purchases in India, Brazil, and Indonesia were EVs.

In China, on the other hand, EVs accounted for over 42% of passenger car sales by year-end last year, Longview notes, and could rise to 50-60% by 2026.

Demand from EM ex-China economies will therefore account for the majority of global oil demand growth over the next 1-2 years and largely offset softer demand growth from DM economies and China. Taking supply forecasts into account, this should result in overall oil supply deficits and falling inventories. That sets the stage for stronger oil prices on a 1-2 year view, Longview suggests.

Geopolitics

The global energy market cannot escape the impacts of geopolitics. Focus on the changing world order has increased in recent times, notes fixed-income specialist Western Asset, part of global funds manager Franklin Templeton.

The world has entered a year of election — over 60 countries, with more than half the world’s population, are going to the polls. Higher energy prices are likely a major focus for most of these elections, given the impact of increased consumer spending on gasoline and the erosion of consumers’ disposable income.

Western Asset contends oil market fundamentals weakened at the start of 2024 relative to 2023 as supply-side dynamics, such as the return of OPEC’s role in balancing the market, overtook demand, warranting a more cautious approach to considering current valuations. Consequently, Western Asset believes the market is more supply-driven in this cycle and therefore prices are set to remain volatile.

However, Western Asset acknowledges both the potential for price spikes if geopolitical tensions escalate as well as the prospect of supply disruption, such as drone attacks on Russian refineries and oil infrastructure, or maritime attacks in the Red Sea.

This adds volatility to an already tense situation; the recent tit-for-tat strikes between Iran and Israel, and potential US intervention are adding jitters. Continued supply-side restraint (namely from OPEC-Plus), the domestic US oil industry remaining conservative in allocating capital to growing production, and a more sustained economic recovery taking hold (which would bolster demand) would also add upward pressure to prices.

Any acceleration in demand, Western Asset added, would likely warrant a supply response, which would dampen the overall impact on prices.

On the demand side, global oil consumption is at an all-time high, surpassing pre-covid levels and still increasing, but at a slower rate. Western Asset observed some softness in demand at the start of this year, which is attributable to slower worldwide economic conditions and the subsequent rise in economic and geopolitical uncertainty. However, a soft-landing scenario now appears to be market consensus, partially dampening uncertainty and providing a more supportive base of demand.

Pockets of demand in 2024 have arisen in petrochemicals and aviation sectors, in which capacity expansions and travel have increased. Strategic petroleum reserves were in the process of being replenished or bolstered at lower prices, but now the potential for a release is evident given higher energy prices and US election timing. Higher energy prices, the continued strength of the US dollar and higher borrowing costs themselves may also lead to demand destruction.

Beyond 2024, EV demand growth is estimated to erode approximately -200,000 to -300,000 barrels per day of demand alongside increased focus on energy efficiency. Offsetting this is the growth in China, India and other EM economies as key drivers for future demand, with increasing appetites for petrochemicals and transportation.

On the supply side, noted Western Asset, growth in non-OPEC supply from prior investment in large-scale, long-lived reserves in places such as Brazil, Guyana and Canada, have started to bear fruit. This is coupled with the return of US shale production. Consolidation within US shale has continued to grow, protecting future drilling inventory and reducing the number of domestic players, which serves to better manage supply as a result. Consequently, supply growth has outpaced the growth in demand.

Western Asset contends the OPEC-Plus alliance would need to shoulder the burden (again) to balance the market, with the responsibility falling primarily on Saudi Arabia, which would increase spare capacity and, in turn, erode its market share. All of this raises the question of how long cuts will persist. Current OPEC-Plus actions are appearing to keep pressure on the Biden administration in the run-up to the November elections in the US.

The next OPEC meeting on June 1 will be closely monitored with a focus on the enforcement of voluntary cuts by members. As a result, Western Asset believes inventory builds can be managed, but with a lower margin of safety for preserving market balance.

Trump versus Biden

From the start of his administration, President Trump signaled American energy dominance would be a cornerstone of both his economic and foreign policy. The abundant American resource endowment was seen as ensuring that retail gasoline prices would remain contained, notes RBC Capital Markets. At the same time, it was viewed as providing the option to sanction foreign policy adversaries such as Iran and Venezuela while shielding US consumers from the economic impact of such coercive measures.

When American output proved insufficient to prevent price increases, President Trump would publicly cajole OPEC to increase output. Global climate commitments were scrapped as the White House focused on its full-throttle rhetorical support of the US oil and gas industry.

President Trump was forced to abandon his longstanding antipathy toward OPEC when the covid pandemic and the Russia-Saudi price war caused oil prices to collapse and threatened the American shale industry, RBC notes.

President Biden, by contrast, pledged to renew American leadership in the fight against climate change. Re-entering the Paris Agreement and pulling the plug on the Keystone XL pipeline were among his first executive orders to demonstrate the White House’s commitment to accelerating the energy transition and turning the page on the Trump era.

With the early move to pause new permits for drilling on federal land, it seemed the administration would indeed look to shrink the footprint of American oil and gas drilling.

In RBC’s early conversations, senior administration officials indicated the rapid energy transition would lessen the need to focus on energy security concerns and managing relations with key producer nations. The view that we were rapidly approaching a peak demand scenario also dovetailed with the stated policy desire to extricate the US from the Middle East and refocus resources on global power competition with China.

Then Russia invaded Ukraine. Biden was forced to pivot, RBC recalls, from telling US producers to keep the oil in the ground to imploring them to produce more when faced with rising energy prices due to a war involving one of the world’s largest commodity producers.

The administration prioritised getting as much US LNG to Europe as possible to stave off a major energy crisis and implemented a policy that prioritised averting oil price shocks, whether by drawing down the US Strategic Petroleum Reserve or removing/lightly enforcing sanctions on key energy producers.

The return of Trump would seem to herald a return to maximum pressure measures and a rigorous enforcement of energy sanctions, RBC suggests. And yet, even the most well-placed Trump advisors concede they would not look to remove large quantities of Iranian oil immediately, unless they could get a backfill from the major Gulf producers to keep oil prices in check.

President Biden’s decision to suspend LNG permitting approvals proved to be divisive with the oil and gas industry, RBC notes, and it is unclear whether it will garner him additional support from progressives and young voters.

While the pause on non-free trade agreement LNG export approvals does have implications for projects, RBC points out, that otherwise would have reached final investment decision (FID) status this year, there are a whole host of projects currently under construction and planned to come online before the end of 2028 that are unaffected by the pause and thus should be coming online regardless.

This puts any implications from the current ban in the 2029-30 period (when projects that might have reached FID this year could target as start dates). By that point, the US will have increased export capacity by nearly 80% versus today’s level. In any case, the pause will likely be lifted or cancelled by this time next year, independent of the election outcome.

If Trump were to win the election, it seems fair to assume this pause will simply be cancelled, RBC suggests. But in another Biden administration, the pause could very well be behind us, as the US Energy Secretary said in March the pause would be lifted within a year. In that scenario, RBC would expect to see approvals resume, albeit possibly with an added climate-related hurdle included in the public interest analysis.

In Congress and on the campaign trail, Republicans have been calling for a repeal of Biden’s Inflation Reduction Act (which centres around, among other things, providing subsidies for renewable energy investment, intended to reduce energy costs, eventually) and the billions in clean energy funding within the legislation. The IRA is protected from being repealed solely through executive order, as it was passed through Congress, yet the President still has authority to contour the framework of the law to make tax credits more difficult to access, freeze any unallocated money, or revise unfinalised rules.

Stymying wind development in particular could be high up on the Trump agenda. Of the US$145bn in direct agency spending provided in the IRA, only 41% has been awarded, RBC notes. Any unallocated funds may be paused indefinitely under a Trump administration, even those that have been announced. The Biden administration is rushing to finalise rules for outstanding tax credits and disperse billions in grants and loans by the end of June to protect it from the Congressional Review Act (CRA).

If Republicans take control of the White House and both chambers of Congress, they could use the CRA to quickly void rules promulgated by federal agencies or repeal aspects of the IRA through a simple majority, RBC points out. A divided Congress would make a partial or full repeal difficult, providing a safeguard to Biden’s keystone climate legislation.

East Coast Gas

In assessing the southern Australia gas market (NSW, Victoria, South Australia, Tasmania), Jarden forecasts a reduction in demand due to demand destruction from high prices and greater efficiencies. However, southern gas production is falling at a faster rate.

Jarden concludes a material increase in gas supply is needed by 2028, via either new southern gas production capacity (unlikely in the analysts’ view), gas via pipeline from Queensland/Northern Territory, LNG imports, or a material expansion of storage capacity.

The need to bring in more expensive supply sources (in particular LNG imports) is consistent with the conclusions reached in the Federal Government's recently released Future Gas Strategy. It concludes more gas supplies are urgently needed and, while more domestic supplies are critical, LNG imports will also most likely be needed. The cost of LNG imports depends on a number of unknown factors, in particular the price of the LNG being purchased.

The report reaches the same conclusion as Jarden does: LNG imports would set southern gas prices. The analysts forecast gas prices will increase to $18/GJ by 2030 but could trade in a range of $17-20/GJ.

Jarden expects higher wholesale gas prices to lead to higher retail gas prices and higher electricity prices. This dynamic is negative for gas and electricity users, but positive for retailers with legacy low-cost gas supplies, such as Origin Energy ((ORG)).

Gas producers with gas volumes set to be re-contracted or re-priced over the next six years, which includes Beach Energy ((BPT)), Cooper Energy ((COE)) and, to a lesser extent, Santos ((STO)) and Woodside Energy ((WDS)), plus potentially APA Group ((APA)), as reliance increases on gas supplies from Queensland/Northern Territory to meet southern demand.

In Jarden’s coverage universe, Cooper, Beach and Origin are the biggest winners from higher gas prices. Small cap Cooper is the purest exposure to higher gas prices. A $1/GJ increase in forecast gas price would increase Jarden’s valuation by 8.7%.

For Beach, a similar sensitivity results in a 4.6% increase, based on the exposure from its Victorian and Cooper Basin gas production. For Origin, a $1/GJ increase in gas prices generates a 2.0% increase in valuation, thanks primarily to its legacy gas contract position.

While both Woodside and Santos have some exposure to east coast prices, the valuation sensitivity to a $1/GJ gas price change is less than 1%.

An increased reliance on piped gas to meet customer demand is positive for APA and should underpin further expansion (particularly in the link to Victoria), Jarden suggests, but the current regulatory review underway might negatively impact timing, increasing the risk of supply shortfalls or enhancing the need for LNG imports if this is not resolved in the next 12 months.

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