Oil Markets Respond Timidly to The Death of Iran's President
Key oil market developments this week, short and sharp like your morning espresso.
5 min read
Summary
Iran: The death of Iran's President in a helicopter crash on Sunday led to an immediate spike in oil prices, however our outlook for Iranian and Middle Eastern fundamentals remains unchanged.
U.S. Shale Production: Record U.S. oil output reached 13.1 million barrels per day in March. U.S. supply growth is far outpacing demand growth.
Refinery Outages in Russia: Maintenance and Ukrainian attacks are cutting Russia’s refinery output by approximately 600,000 b/d.
Refinery margins remain strong in the U.S. and in Europe and will continue to be for the next few months.
US Gasoline Demand Decline: EIA reports a 4.4% year-on-year drop in April, with consumption at 8.5 million barrels per day.
Unexpected US Crude Inventory Build: Inventories rose by 4.91 million barrels to 432 million barrels.
Positive Economic Signals: Oil prices rose slightly this week, supported by U.S. and China economic data.
Indonesia's Oil and Gas Auction: Indonesia is offering five blocks, aiming for $1 billion in investments to increase production from 700,000 barrels per day to 1 million barrels per day by 2025.
OPEC+ have their next meeting on June 1st. Members will need to achieve a consensus to determine whether crude production changes from current levels. We expect already established voluntary cuts to be extended if oil remains below $95 USD/BBL.
Geopolitics
Russia and China Pipeline Deal: Russia and China are nearing the completion of the Power of Siberia 2 pipeline deal, which will increase gas exports from Russia to China. This agreement is significant given the ongoing geopolitical tensions and the strategic shift in energy alliances. In April, Russia's oil exports dropped to a five-month low due to refinery repairs and sanctions, highlighting Russia’s need for alternative avenues for energy exports.
Middle East Tensions: The unexpected death of Iran's President and Foreign Minister in a helicopter crash while on their way to inaugurate a project at the Tabriz oil refinery in North-western Iran led to an immediate but short-lived spike in oil prices. This event does not change our outlook for Iranian oil fundamentals, unless the crash is linked to Israel, which is unlikely. If anything, Iranian exports may increase to boost revenues among domestic political turbulence.
Oil prices increased by 2% immediately following the announcement of the Iranian President's death.
Brent crude remains hovering around $82 USD/BBL.
Venezuela's Military Movements: Venezuela has moved substantial military forces to the Guyana border, escalating regional tensions and potentially affecting oil production and exports from the area.
Venezuela’s oil production stands at approximately 700,000 barrels per day, with potential disruptions affecting global balances.
Regional tensions have historically led to fluctuations of up to 5% in regional oil prices.
Oil Production
US Shale Production: The US continues to set records in oil and gas production, with output reaching new highs. Recent mergers, such as Crescent Energy's acquisition of SilverBow, indicate ongoing consolidation in the shale sector, which is expected to enhance efficiency and sustain high production levels.
US oil production reached 13.1 million barrels per day in March, the highest in history.
Crescent Energy’s acquisition is valued at $1.2 billion, emphasizing the scale of consolidation in the sector.
Indonesia's Oil and Gas Auctions: Indonesia has launched its first oil and gas block auction for 2024, offering five blocks to attract investment and reverse declining production trends. This initiative aims to bolster energy security and boost production capacity.
Indonesia aims to increase its oil production from 700,000 barrels per day to 1 million barrels per day by 2025.
The five blocks offered are expected to attract investments worth $1 billion.
Refining
Russian Refinery Issues: Extensive refinery repairs in Russia, largely due to attacks from Ukraine, have significantly impacted oil product exports, reducing output in April and tightening global supply conditions.
Russia’s refinery output dropped by 10% in April due to maintenance activities.
Oil product exports fell to 2 million barrels per day, from 2.3 million barrels per day.
Petrobras Refinery Investments: In Brazil, President Lula has urged Petrobras' new CEO to expedite investments in refinery and gas infrastructure. This is aimed at boosting domestic processing capabilities and reducing reliance on imports.
Petrobras plans to invest $10 billion over the next five years in refinery upgrades.
Brazil’s current refining capacity is 2.2 million barrels per day, with a target to increase by 15% by 2026.
Downstream Demand
US Gasoline Demand Decline: US gasoline demand has shown signs of weakening, with the EIA reporting a 4.4% year-on-year decline in April (falling from 8.9 million b/d in April, 2023 to 8.5 million b/d in April, 2024)
Gasoline inventories increased by 5 million barrels partly as a result of reduced demand.
Mixed Oil Demand Forecast (IEA): Despite current bearish indicators, analysts predict that global oil demand could surprise to the upside, driven by increasing demand from Asia and other emerging markets. Significant stock draws are expected in the first half of 2024. The IEA lowered its demand forecast for 2024, however a softer dollar and cooling OECD inflation data has provided a price floor.
Global oil demand is forecasted to grow by 2 million barrels per day in 2024, according to the IEA.
Asian demand, particularly from China and India, is expected to account for 70% of the growth.
Oil Inventories
US Crude Inventories: US crude oil inventories posted an unexpected rise, with the American Petroleum Institute reporting a build of 4.91 million barrels, contrary to expectations of a drawdown. This increase has exerted downward pressure on oil prices.
Crude inventories increased to 432 million barrels, up from 427 million barrels the previous week.
The build was primarily due to higher-than-expected imports and lower refinery runs.
Macroeconomics
GDP growth this year will be highest in the Asia-Pacific region (≈4%), followed by North America (≈2.5%) and the Eurozone (≈0.6%). Growth is generally expected to be lower in 2024 vs. 2023, with more of a reversion to the mean in 2025.
Oil Price Forecasts: Analysts forecast a subdued year for oil prices in 2024, with some predicting prices could remain around $80 per barrel. However, increased demand and potential supply disruptions could drive prices higher. Major banks like Goldman Sachs and Citigroup have revised their price forecasts to reflect these mixed signals. Significant spare capacity across OPEC+ has a bearish influence on current prices.
Goldman Sachs revised its oil price forecast to $70-$90 per barrel, down from $80-$100.
Citigroup predicts an average price of $75 per barrel for 2024.
Economic Indicators and Oil Prices: Positive economic signals, such as inflation optimism and therefore potential interest rate cuts on the horizon, have recently pushed oil prices higher. However, the broader macroeconomic environment remains uncertain, influenced by central banks' monetary policies and global economic performance.
Inflation rates in major economies are stabilizing, with the US inflation rate dropping to 4.1% in April from 4.5% in March.