Just a month ago, the dominant narrative in energy news sections was one of surplus supply and consistently weak Chinese demand. Now, some are starting to talk about a deficit, especially after the Biden administration’s farewell sanction package aimed at Russia.
John Kemp wrote a column about the state of global supply earlier this month, noting that “U.S. crude oil inventories have depleted much faster than normal since the middle of 2024.” Usually, the depletion of inventories is a result of strong demand, and indeed, U.S. demand, for all the predictions of the EIA, has proved resilient, even hitting a seasonal record at one point in spring 2024. That record was 800,000 bpd higher than EIA’s weekly estimates, which “unnerved market experts”, per Reuters.
However, it was not only the United States. Crude oil inventories in the Organization for Cooperation and Development have also been depleting faster than many have hoped, chief among them the International Energy Agency, which, like the EIA in the United States, has consistently underestimated the balance between demand and supply in crude oil.
Even if all these signals were overlooked, the effect that Biden sanctions had on international prices should have been proof enough that the surplus narrative is in a precarious relationship with reality. Had the oil market really been in surplus—and a large one—the sanctions would not have had any palpable effect on benchmarks.
Consider the International Energy Agency’s November prediction that crude oil supply this year would exceed demand by as much as 1 million barrels daily—and that even if OPEC+ keeps its production caps in place. In January, the IEA allowed for a supply draw even though it stopped short of seeing a chance for a deficit.
“If decreases in supply from weather impacts, sanctions, or other developments become substantial, oil stocks can quickly be drawn to meet operational requirements in the near term,” the agency said, citing Russian sanctions, the prospect of new Iranian sanctions, and the current seasonal jump in demand. What it did not cite were Trump’s plans to refill the Strategic Petroleum Reserve, which is bound to push prices higher unless the new administration is very careful with the buying. The other thing that most forecasters do not seem to consider when they make their forecasts is production.
The standard story is that non-OPEC supply, led by the United States, would surge so much this year that it would completely offset the continuing OPEC+ cuts and keep the world oversupplied. The fact that U.S. oil majors have signaled multiple times that they have no intention to do anything of the sort remains largely ignored by analysts—but not by oil traders.
Kemp again reported this month that bullish bets on crude oil had increased to the highest volume in nine months in anticipation of the effect of sanctions on Russian and Iranian crude and, as a consequence of that, on global supply. Speculators had bought the equivalent of 330 million barrels across the six most traded contracts in the five weeks since December 10, Kemp wrote, bringing their total exposure to 553 million barrels—the highest since April last year.
Even so, prices this week dipped following President Trump’s declaration of a national energy emergency and his sign-off on a slew of executive orders aimed at boosting the United States’ oil and gas production. The EIA again sounded a bearish note, repeating its prediction from last week that “Strong global growth in production of petroleum and other liquids and slower demand growth put downward pressure on prices.”
Aramco, on the other hand, got bolder in the context of the latest developments with a bearing on oil prices. The company’s chief executive this week predicted that oil demand growth would strengthen to 1.3 million barrels daily this year, reaching a new all-time high of 1.6 million barrels daily, Amin Nasser said at the World Economic Forum gathering in Davos.
It’s worth noting that the IEA also revised its demand growth expectations for this year, from an estimated 940,000 bpd for 2024 to 1.05 million bpd for this year. The agency cited an improved economic outlook as the reason for the revision—implicitly suggesting that the energy transition is not really affecting oil demand, despite claims to the contrary put forward repeatedly by the IEA itself and others.
There is, of course, a possibility that oil prices will tank hard this year. That possibility is contingent on Trump’s removal of U.S. sanctions on Russia. Under such a scenario, whatever sanction action Trump takes on Iran, the market would hardly feel it. However, the prospect of such a move are, for the moment, of uncertain nature. This means that global oil supply remains constrained, while the hoped-for rate of production growth is as uncertain as Trump’s move on Russia sanctions.
By Irina Slav for Oilprice.com
