Crude prices have been rising this week, but it’s interesting to note that the driving forces appear to be shifting. That could have important implications for whether or not Brent crude prices manage to break out of the range that has confined it for the last month or so. It’s been nearly two months now since Brent has made a run at $80/bbl, so the question now is whether the current rally will continue or fade like the last ones.
The collapse of the Assad government over the weekend is certainly an important catalyst for Middle East geopolitics. That would normally have moved the price of crude, even if Syria itself isn’t a major producer. However, the price of crude was largely stable in the aftermath. The gathering momentum didn’t come until the reports from the EIA and OPEC over the next couple of days. This suggests that Brent crude prices are shifting their focus from geopolitics to demand and supply concerns.
Meet the New World…
Even before taking office, US President Elect Donald Trump is already pushing to have an impact on the world stage. That includes looking for some kind of cessation of the conflict in Ukraine, which he promised to do before taking office back when he was campaigning. Israel has reached a shaky ceasefire with Hezbollah, and reportedly Houthi rebel attacks on ships in the Red Sea have deescalated. Although the conflict situation is far from resolved, and could flare up at any moment, the market’s muted reaction to recent geopolitical events suggests that traders are less worried about wars than before.
What are markets worried about? Demand. Specifically, the potential lack of it. The world’s two largest national economies are also the largest consumer and importer, and the latest reports suggest their participation in the energy market is shifting. Peak demand for internationally traded crude might come sooner than expected, while the new Trump administration vows to support as much production increase as possible.
Driving the Price Down?
China is the world’s largest importer of crude, and recently stepped up its buying. But that was seen mostly going to increasing inventories, taking advantage of dips in price over the last month. That implies that the Asian giant could pull back on buying if prices rise too much, providing extra resistance to crude.
The recent IEA report suggested that Chinese demand for crude could turn around substantially, even if the recent stimulus measures actually boost the economy. That’s because of the fast rate of adopting electric vehicles, which are an increasingly large share of its automotive fleet. The country also keeps building out its domestically-sourced energy infrastructure.
And More Production?
The IEA also expects the US, the largest crude consumer, to cut back its imports next year. That’s thanks to expectations of increased production. Additionally, Canada is on track to connect its trans-mountain pipeline that would bring more export capacity to the market. Even if the US economy increases, the expectation from the IEA is that it will source its crude demand internally.
The latest OPEC report cut its demand forecast for the fifth time this year, and by the largest amount as well. Typically, OPEC is more optimistic about demand, and it still sees global consumption increasing next year. But the slower pace of increase implies that the expected supply crunch might not materialize. As a result, the oil cartel seems more likely to keep its production curtailments in place for longer. But with less buying on international markets by the two biggest countries could mean that OPEC spends the year fighting to keep the price from going down, instead of actually pushing it higher.