Oil prices dipped slightly on Friday, despite recording a notable weekly gain due to heightened tensions in the Middle East and a bullish update from the International Energy Agency (IEA).
The West Texas Intermediate contract for February dropped by 67 US cents, or 0.9%, settling at $US73.41 per barrel. In comparison, March Brent oil lost 54 US cents, or 0.68%, settling at $US78.56 per barrel. These fluctuations resulted in a 1% increase in WTI prices for the week and a marginal 0.47% rise in Brent prices.
The primary driving factors behind these shifts were the recent attacks by Houthis in the Red Sea, which raised concerns about potential supply disruptions, and the IEA's upward revision of projected 2024 oil demand. However, it's worth noting that the IEA's forecast remains more conservative than OPEC's.
This marks the third consecutive increase in demand forecasts by the Paris-based IEA over the past three months. Their current prediction anticipates a global oil consumption increase of 1.24 million barrels per day (bpd) in 2024, which is half of OPEC's projection of 2.25 million bpd. This figure represents an increase from their previous estimate of 1.1 million bpd. Nevertheless, it reflects a slowdown in growth compared to the 2.3 million barrels per day increase in 2023.
The new forecast implies that the average daily global demand for oil in 2024 will reach 103 million barrels. Notably, China is expected to contribute nearly 60% of global demand growth, driven by the expansion of the petrochemical sector, as stated by the IEA.
The IEA's latest upward revision, which is 180,000 bpd higher than their previous projection, is attributed to a more optimistic outlook for global economic growth, lower crude prices in the fourth quarter of 2023, and increased purchases by China's expanding petrochemical sector. According to their January report, this positive outlook is partly due to improved consensus on economic prospects and the tailwind effect of the fourth-quarter 2023 decline in oil prices.
The IEA predicts that the slowdown in demand expansion in 2024 compared to previous years is a result of factors such as the completion of post-pandemic recovery, lackluster economic growth in major economies, improvements in energy efficiency, and the growing presence of electric vehicles.
In summary, the IEA expects a decrease in the rate of demand growth in 2024, projecting a daily increase of 1.2 million barrels compared to the 2.3 million barrels seen in the previous year. Despite this, global demand is expected to average 103 million barrels per day.
While China remains a significant contributor to demand growth, there are concerns about the sustainability of this trend throughout 2024. Barring major disruptions in oil supplies, the IEA believes that the market is reasonably well supplied in 2024, despite ongoing output cuts by OPEC and the OPEC+ alliance. However, the potential for a substantial surplus exists if these voluntary cuts are reversed in the second quarter, thanks to strong production growth from countries outside the OPEC+ group, including the United States, Brazil, and Guyana.