Standard Chartered: Oil Demand Isn’t as Bearish as You May Think

Oil prices have been on the backfoot in the current week, pulling back from gains in recent weeks thanks to easing geopolitical fears and seemingly never-ending demand concerns.

On Monday, U.S. Secretary of State Antony Blinken announced that Israeli Prime Minister Benjamin Netanyahu had accepted a cease-fire proposal to stop the war in Gaza, but on Thursday, sources close to the White House reported that such a deal is once again out of reach as Hamas is unlikely to accept the Israeli terms, which include the occupation of the Philadelphi corridor, which Israel claims has given Hamas a strategic lifeline

Crude oil futures fell significantly on Wednesday, with WTI crude falling to $72 per barrel and Brent crude falling briefly into the $75 dollar handle. Prospects of weak demand in China offset any gains from risks to supply, with government data showing that crude demand in the country fell 8% Y/Y in July.

Commodity analysts at Standard Chartered have been able to gauge crude demand on a global scale following the release of Joint Oil Data Initiative (JODI) data on 19 August.

According to StanChart, global oil demand in the month of June clocked in at a healthy 103.01 million barrels per day (mb/d), an all-time high. Following JODI revisions, StanChart estimates that May demand came in at 102.68 mb/d, the second-highest monthly average after June. The average demand growth for the second quarter was 1.521 mb/d y/y, close to StanChart’s forecast for 2024 full-year growth (1.514 mb/d).

The only bearish data point in that report is that demand growth has been slowing, with June demand growth clocking in at 788 thousand barrels per day (kb/d), a deceleration from 1.267 mb/d in May and 2.129 mb/d in April. StanChart has predicted that global demand will remain above 103 mb/d for the rest of 2024, before falling to 101.9 mb/d in January due to seasonality.

Meanwhile, global crude supply growth remains muted, with June supply increasing by 160 kb/d m/m to 102.097 mb/d, well below December 2023’s all-time high of 103.162 mb/d.

Constrained global supply growth can largely be chalked up to weak non-OPEC growth, particularly by the U.S. Oil production in the United States is set to grow just 2.3% in the current year as shale producers stick to production discipline and goal to return capital to shareholders. Crude exports from U.S. ports have averaged 4.2 million barrels per day so far this year, up a mere 3.5% Y/Y compared to a robust 13.5% growth in 2023. This year’s growth clip is the lowest since 2015, when the country lifted a 40-year federal ban on the export of domestic crude.

U.S. shale producers are simply not willing to drill more. High decline rates for shale wells usually sets in soon after commissioning, meaning extra well completions are required to offset declines from existing wells if output is to be maintained. Earlier in the year, StanChart reported that the horizontal rig count started to decline sharply in early 2023 and is currently 20% below its post-pandemic peak after flatlining for the past six months. The analysts point out that whereas the completion of previously drilled wells and technical change provide an offset, a significant fall in activity, more often than not, leads to a lagged decline in growth.

Gas Rally Loses Momentum

The big rally in Europe’s natural gas prices that kicked off in July appears to have run out of steam thanks to high inventory levels and easing supply jitters. Dutch front-month futures, Europe’s gas benchmark, were quoted at €37.22 per megawatt-hour on Monday at 1315 hrs ET, largely unchanged over the past 10 days but considerably higher than the price a month ago at €30.10 per megawatt-hour. The gas price rally in the United States has been more subdued, with Henry Hub prices trading at $2.15/MMBtu from $2.01/MMBtu a month ago.

According to the latest Gas Infrastructure Europe (GIE) data, EU gas inventories are on the verge of moving above the EU Commission’s 90% of capacity target 10 weeks earlier than the 1 November deadline. Gas inventories stood at 104.23 billion cubic meters (bcm) on 18 August; good for a fill rate of 89.8%. German storage is already at 93.3% of capacity, well ahead of the country’s 1 September target of 65%.

Last month, the U.S. Energy Information Administration predicted that U.S. natural gas prices will rally strongly in the second half of the current year thanks to production cuts. According to the EIA, the Henry Hub natural gas spot price will average almost $2.90 per million British thermal units (MMBtu) in 2H24, up from $2.10/MMBtu in 1H24, good for a nearly 40% increase.