Summary
- Global oil demand is set to grow by 1.2mn b/d in 2024, led by growth of 1.3mn b/d in non-OECD countries and offset by a small decline in OECD nations.
- Chinese oil demand is forecast to grow by 0.6mn b/d, while Indian demand grows by 0.2mn b/d. Meanwhile, OECD Europe could see growth decline by 0.2mn b/d – driven by weakness in H2 2024.
- Our forecast is towards the lower end of consensus, but we would revise it higher if European demand recovers sustainably.
- This will leave the oil market in a supply deficit of 0.4mn b/d assuming OPEC does not unwind its production cuts.
Market Implications
- We expect Brent to settle around $85/bbl by Q2 with upside risks to $90/bbl in Q3.
Non-OECD Oil Demand to Grow by 1.3mn b/d
Unlike 2023, this year will be less about the recovery from Covid and more about the trajectory of global growth. Chinese demand for jet fuel and gasoline has normalised, while other areas in Asia continue to allow foreign tourists to enter.
Therefore, we should temper our expectations of demand growth this year to a more normalised level. For instance, from 2003 to 2019, global oil demand grew on average by 1.6% annually. If we were to see a more normal growth rate this year, global demand would likely increase by 1.6mn b/d, to 103.3mn b/d. Naturally, some of this will be offset by the lack of growth in the industrial sector, while factors such as EVs and more energy-efficient vehicles also reduce the beta of oil demand to global growth.
We expect global oil demand to grow by a much more tepid 1.2mn b/d in 2024, led by growth in non-OECD countries of 1.3mn, while the OECD nations see demand decline by 0.1mn b/d.
Who is driving global demand higher?
- China – 0.6mn b/d
- India – 0.2mn b/d
- Middle East – 0.15mn b/d
- Emerging Asia – 0.13mn b/d
Meanwhile, declines are driven by:
- OECD Europe – 0.2mn b/d
(Chart 1: orange bars = countries/ regions seeing oil demand growth in 2024, blue bars = countries/ regions seeing oil demand decline in 2024)
Growth Variable 1: China
We expect Chinese oil demand to be more linked to its economy than last year. While bulls argue long-distance travel still has room to grow, we think growth could disappoint relative to expectations due to a more pessimistic Chinese consumer.
Despite this, the largest source of growth will still be in jet/kerosene, which we expect to grow by c. 0.12mn b/d. Meanwhile, the remainder of the growth comes from LPG and Naphtha at around 0.4mn b/d.
We also watch the demand for small EVs, which is gaining traction in cities with a high population density. We highlight the 7.2mn EVs, sold in 2023 (to October) representing 30% of total new car sales in that period. This was a 43% increase on the same period in 2022. Ahead, we could see EVs account for over 40% of total sales as OEMs rush to meet production quotas, while price wars and subsidies ensure products remain attractive to consumers.
The surge in polymer used by Chinese manufacturers, especially for EV production and packaging, is reshaping the petrochemical landscape and supporting fuels such as Naphtha, LPG, and Ethane. In addition, the upcoming start of the 0.4mn b/d refining complex at China’s Yulong Petrochemical plant should increase petrochemical feedstock demand, boosting naphtha demand. A risk to watch is further consolidation in the EV sector as all but a few large producers have been losing money while trying to ramp up production. Consolidation could lead to lower production, particularly in H2 2024.
Another factor to monitor will be China’s management of its crude inventories. We know China was able to build its crude stocks to almost 1bn barrels during H1 2023, allowing them to reduce imports during H2 once prices exceeded $85/bbl. We watch for a similar pattern this year. However, we do not see China building inventories at the same pace and expect around 20mn barrels – half the size in 2023.
Finally, teapot refinery margins will determine demand for fuel oils, bitumen, and the like.
Growth Variable 2: Europe
The most recent European PMIs have looked promising. The Euro area manufacturing PMI bottomed in July 2023 at 42.7 and has since risen to 46.6. Meanwhile, services is more mixed, with the services PMI remaining steady above 48. This means we could finally be past the manufacturing recession that has plagued the region since 2022. The other positive stems from the consumer as real incomes are now recovering from deep declines in 2022.
However, macro risks only increase ahead, while the ECB suggests it can wait for a clearer signal of disinflation being embedded back into the system before cutting. Henry argues they have a keen focus on both wages and profits, which could mean the first rate cut occurs as late as June.
Given that European demand weakness has stemmed from industrial products such as diesel, LPG/ethane, and naphtha, a recovery in the sector could lead to quick wins in demand growth this year.
Germany stands out as a weak link. Local trucking data suggests miles driven have collapsed in recent months – a data point that has correlated well with distillate demand.
Our central case suggests that European oil demand will be steady in H1 but decline more sharply in H2. Clearly, if this does not materialise, there could be upward surprises to our forecast – bringing it in line with a more consensus view.
(Chart 2: orange line = Germany truck toll mileage, 3mma – q/q; Chart 3: orange line = 2023, blue line = 5-year average, grey shaded area = 5-year historic range)
Other Regions
India: Outside China, we see India as being the next largest contributor to global demand growth. We think demand could grow by 0.2mn b/d to 5.5mn b/. However, risks are likely skewed to the downside.
Gasoil will lead demand growth, supported by the country’s robust agriculture, construction, and manufacturing industries. We should also see strong growth in jet/kerosene as the government announced they would be ending the existing windfall taxes.
US: We expect the US to lead OECD demand growth thanks to a robust economy that continues to shrug off the impact of higher interest rates. We forecast US demand growth to rise by 0.1mn b/d in 2024, driven by a recovering manufacturing and freight sector. Jet/kerosene demand should remain strong as well, supported by a buoyant consumer. While gasoline’s beta to upside surprises in GDP growth have been falling thanks to an increasing share of EV sales and more efficiency, we expect no decline in 2024 and instead demand to increase marginally.
Middle East: While Middle Eastern demand growth increased by around 0.1mn b/d in 2023, we expect a larger increase in 2024. We see continued growth in jet fuel and petrochemicals (LPG/ethane) driving much of the rebound, with Saudi Arabia, the UAE, and Iraq seeing particularly robust growth.
One trend to highlight is the increased use of natural gas for domestic power generation – particularly during the summer.
Expect Deficits in Q2 and Q3
In sum, we expect the market to be in a deficit of around 0.4mn b/d in 2024, which should lead to an average price of $82-$83/bbl on Brent. The big difference this year versus 2023 will be that global inventories will be stable during Q1 rather than seeing material builds.
Q3 in particular could present upside risks similar to last year with oil hitting $90/bbl. Beyond this, we will remain focused on risks arising from European demand, how China looks to deal with its deflating property bubble and risks to US production.
Given this forecast, we do not see OPEC+ being able to reverse its production cuts this year. But with prices sustainably above $80/bbl, it may be enough to appease the group.
Below we lay out a few scenarios and discuss how they could impact the oil price:
- A slow unwind of OPEC+ cuts following Q2. In this scenario, we assume that OPEC+ unwinds 1mn b/d of its most recent cuts leading to a slightly oversupplied market. Should this occur, we think Brent’s average price would fall to $77 /bbl.
- US production growth surprises higher, again. If we see another upward surprise in US oil supply growth (we assume a surprise of 0.2mn b/d), we think the deficit will shrink to around 0.3mn b/d. In this scenario, we expect an oil price of $81/bbl.
- European recession. In a scenario where higher interest rates result in rising unemployment, particularly in Europe, Sweden, and Australia, we could see oil demand fall by a further 0.8mn b/d. Should this occur, it will swing the market back into balance and push the average Brent price to $78/bbl.
(Chart 4: orange line = global oil surplus/ deficit in 2024 per quarter; Chart 5: orange bars = global oil demand per quarter, blue bars = global oil supply per quarter)
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Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.
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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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