Rystad Energy Oil Macro Market Update: October 3, 2024

“Fast-increasing geopolitical risk is driving oil prices higher this week.

The worsening conflict in the Middle East is causing significant supply problems in the global crude oil market, with prices rising more than 4% this week.

“The potential for supply disruptions – particularly but not exclusively from Iran – increases as fighting intensifies. But OPEC+ still has unusually large spare capacity, the result of successive production cuts over the past two years.”

“This spare capacity prevents, for now, a price spike amid one of the deepest and most far-reaching crises in the Middle East in the last four decades.”

Last week, the US government released the final estimate of GDP growth and the PCE index, showing solid economic growth and cooling inflation.

At the same time, China's manufacturing sector recorded a decline, with pessimistic sentiment about a sluggish economy continuing and the market therefore may be waiting for further monetary and fiscal support from China, while also keeping an eye on US macroeconomic data to assess the likelihood of a slowdown to estimate a soft landing.

The final estimate of U.S. GDP showed growth of 3% in the second quarter, in line with consensus, according to data released on September 26.

The U.S. PCE price index rose 0.1% in August, resulting in a year-on-year inflation rate of 2.2%, below the 2.4% forecast and nearing the Federal Reserve's 2% target.

Despite these positive economic results, the momentum in oil prices sparked by last week's US interest rate cuts did not last due to skepticism over China's stimulus package.

Additionally, oil volatility increased on September 26 due to expected supply increases from Saudi Arabia and Libya, contributing to a further downward spiral in prices.

Rystad Energy's updated U.S. oil production outlook remains largely unchanged from the previous update, with slight upside potential for the remainder of 2024.

Crude oil and condensate supplies are estimated to increase by 280,000 bpd in 2024 and 356,000 bpd in 2025.

Hurricane Helene impacted oil and gas operations in the Gulf of Mexico last week, leading to a decline in operations and evacuations at some offshore production sites, while Rystad Energy has yet to assess the impact.

In the refining sector, South Korean production is expected to fall from 2.95 million bpd in August to 2.77 million bpd in September due to weak margins, delayed crude oil deliveries and maintenance work, with lower demand for gasoline and diesel in Europe, Asia and the USA.

In China, the Yulong refinery complex began operations at one of its crude oil units, although the expected increase in crude oil production could lead to a domestic surplus of gasoline and diesel, complicating the refining landscape.

As China's economic situation continues to evolve, Rystad Energy has adjusted its forecasts for the country's oil demand for the second half of 2024 to an average of 16.7 million bpd, a decrease of 330,000 bpd compared to the previous forecast.

Total demand growth in 2025 is now estimated at 75,000 bpd, up from 290,000 bpd.

China's manufacturing purchasing managers' index, reported on September 29, rose to 49.8 from 49.1 in the previous month.

Although the number increased and was above the market expectation of 49.5, it remains below the 50 mark, still indicating a decline.

Despite last week's surprise drop in S. crude oil inventories of 4.5 million barrels – significantly more than the 1.4 million expected by Rystad Energy – the impact on Brent and WTI prices remained unchanged.

Global balance sheets are expected to remain tight in the second half of 2024, but clear signs of recovery in Chinese demand are needed for positive price sentiment.

Since October 2nd, the crisis in the Middle East has worsened and the risks to oil supplies are increasing.

Currently, Iran produces about 4 million bpd of crude oil and exports about half of it, mostly to China.

In the event of a war in which Iran was directly involved, the risk of a reduction in its crude oil exports would become real.

Nevertheless, OPEC+ reserve capacity currently stands at more than 5 million bpd, which could be deployed relatively quickly (within 60 days) to fill the gap.

However, should the Strait of Hormuz be affected, all bets would be off.

In fact, more than 13 million bpd of crude oil passed through the strait in Q3 2024, and inflows reached up to 15 million bpd in H1 2023.

Any blockage of the Strait would lead to runaway prices, which would rise quickly and steadily the longer the blockade lasted.

On the macroeconomic side, the focus this week will be on the labor market as several key releases are expected, although further stimulus announcements from China are also expected.

The unemployment rate in the US is expected to remain at 4.2% in September, while in Europe it is expected to fall to 6.4%.

Inflation in the euro zone fell to 1.8% in September from 2.2% in August, strengthening the case for a rate cut this month.

In addition to inflation, labor market data is also used as an additional indicator to estimate the extent of interest rate cuts in the coming months.

Recent inflation-related data has been relatively positive, cooling towards the government's target, but some remain concerned about rising unemployment in 2024.

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September 2024 issue of World Pipelines

The September 2024 issue of World Pipelines contains articles on pipeline construction, deepwater pipelines, hydrogen transport and pipeline pigging. Our keynote section focuses on pipelines in North America and we also offer technical articles on pipeline integrity and sensing.

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