Oil: Bottomed out?

The bear run in the global crude oil market may soon be short of legs. That much was made clear by Opec – which minced no words in its latest monthly oil outlook report – in terming the recent round of downward price pressure as “overblown and exaggerated sentiments”. Ever since the Russia-Ukraine war, the disconnect between OPEC and the West in terms of viewing global oil demand has grown to historic highs.

More than most things, it is the demand from China that divides the two camps. While the Western media is all skeptical of Chinese economic recovery, terming it slower than expected and hitting a “roadblock” – Opec paints an entirely different picture. Recent history suggests OPEC has been right most of the times about Chinese crude oil demand. Recall that non-Opec producers had been warning of a slowdown of crude oil demand from China for the most part of 2023. The fact of the matter is that China is all set to end 2023 at an all-time high – and way clear of the 5-year average.

Opec sees both China and India to show stronger demand in 4QCY23 – which becomes the basis for upward revision in 2023 global oil demand to 2.5 mb/d. On the supply front, US production continues to increase gradually as indicated by monthly data. On the flip side, Opec crude oil production in October 2023 remained well below the agreed level under the Opec Declaration of Cooperation – which relates to coordinated production cuts.

While both Russia and Saudi Arabia have taken the lead in cuts – at times –voluntarily- other big producers such as Nigeria are still producing much lower than the allowed quota. A lot has been said about the diminishing crude stockpiles – but they still remain well below the 5-year average, as Opec terms the recent inventory slowdown is a result of “seasonal adjustments” and heavy refinery maintenance in key oil-producing countries.

As has been flagged by independent observers, Opec also blames speculative financial markets behavior, as the main reason for the recent downturn in crude prices – that led to a rally extending to three-weekly losses. Opec next meets in less than two weeks, and the bare minimum expectation is reiteration of the production cut. What cannot be ruled out, however, is Saudi Arabia extending the voluntary cut of 1 mbpd beyond the end of 2023. From what it appears, crude oil may well have bottomed out for now.