Brent crude climbed 1.6% on Friday, to mark a three-week high, but the bigger picture is bleaker.
Brent crude and West Texas Intermediate (WTI) have generally traded in a $6 range since September, reflecting a precarious balance between near-term supply constraints and medium-term oversupply risks. However, since the start of the year, Brent is down 1.49%
Here’s a look at some 2024 figures and some recent news.
The decline of oil
Brent crude reached US$119.02 on June 6, 2022, partly due to Russia’s invasion of Ukraine. But since then, the trend has been downward. Currently, Brent crude costs US$74.49 per barrel.
In hindsight, BHP’s sale of its oil portfolio on June 1, 2022 appears to be excellent timing.
A five-year chart:
Source: Business Economics
The main factor behind this decline is the increase in supply. In its December report, the International Energy Agency (IEA) forecast consumption of 103.9 Mb/d in 2025, but a supply of 104.8 Mb/d “even in the absence of unwinding of reductions OPEC+”. This represents a surplus of 900,000 barrels per day.
A secondary factor is the shift away from fossil fuels to electric vehicles and renewable energy. But, according to the IEA, electric vehicles only accounted for about 18% of total car sales in 2023. It is estimated that full displacement of “ICE” (internal combustion engine) vehicles will not be possible for decades, especially in developing economies, due to their affordability and accessibility. challenges related to charging infrastructure. Electric vehicle sales remain concentrated in just a few markets (China, Europe and the United States accounted for 95% of global electric car sales in 2024).
The year 2024 is difficult for XEJ
Australian energy stocks have been hit hard by falling oil prices.
- The S&P/ASX 200 Energy Index is down 21.31% year to date.
- BetaShares Australian Resources ETF (ASX:QRE) is down 14.06% since the start of the year.
- Woodside Energy Group (ASX:WDS) is down 24.04%.
- Santos (ASX:STO) is down 15.49%.
- Beach energy (ASX:BPT) is down 16.56%.
Bucking the trend, Origin Energy (ASX:ORG) is up 22.9%. This may be due to the company’s financial performance and diversification into renewable energy. Origin recorded strong revenue increases in its half-year and full-year results.
International oil companies performed better.
- BetaShares Crude Oil Index ETF (ASX: OOO) is up 2.27% since the start of the year. This fund tracks the S&P GSCI Crude Oil Excess Return Index.
- The BetaShares Global Energy Companies ETF (ASX:FUEL) is up 2.73%. This ETF invests in companies like Chevron, Exxon Mobil and Shell.
Majors like ExxonMobil and Chevron have more diversified portfolios than their Australian counterparts, making them more resilient to changes in oil prices. They invest in low-carbon projects as well as downstream operations like refining and petrochemicals.
Weekly push and pull
Some forces pushing oil higher:
- Sanctions speech. There are reports that the Biden administration is considering new sanctions against Russia as well as Iran (in response to its nuclear development program). Meanwhile, the European Union backed its 15th sanctions package against Russia, and the G7 targeted Russia’s “ghost” crude tanker fleet, a fleet used to smuggle sanctioned oil.
- Middle East Politics. Although Syria is not a major oil producer, the power vacuum following the fall of the Assad regime in Syria on December 8 has raised fears of increased instability.
- OPEC+ production strategy. On December 9, OPEC+ decided to postpone the increase in production quotas until at least March 2025.
- Fall in American stocks, supply restricted in the short term. On Dec. 11, the EIA’s weekly report showed that U.S. inventories at Cushing, Oklahoma (the main delivery and storage center for WTI crude oil futures) plunged to just 22.9 million barrels , the lowest level since 2007. This drop follows the previous week. which indicates stronger domestic demand than expected.
- China’s recovery promises. The Chinese government plans to increase fiscal stimulus measures in 2025, notably through rate cuts. China is the world’s largest importer of oil.
Certain forces push it downward:
- Concerns related to overabundance of supply. As mentioned, on December 12, the IEA forecast an oversupply of 950,000 barrels per day in 2025, which could reach 1.4 mb/d if OPEC+ ends its voluntary production cuts sooner than expected.
- Growth in non-OPEC supply. The United States, Brazil, Guyana, Argentina and Canada are collectively expected to add more than 1.1 mb/d of crude oil and natural gas liquids in 2025. Tengiz’s expansion into Kazakhstan is expected to increase the production of 260,000 barrels per day, and that of Saudi Aramco. The Jafurah gas project will increase Saudi Arabia’s production of natural gas liquids.
- Demand uncertainty. In its monthly report on December 11, OPEC revised downward its forecasts for oil demand growth in 2024 and 2025, lowering the outlook for both years. Demand is now expected to grow by 1.1 mb/d in 2025, reflecting slower-than-expected growth in major non-OECD economies, such as Nigeria, Indonesia and South Africa. China has seen the growth of its oil consumption slow down sharply. Imports fell 4% in November compared to the previous month. Within OECD countries, the United States remains a bright spot for oil demand, but Europe and the Asia-Pacific region are showing signs of stagnation.
- Respect of quotas. Some OPEC+ members exceed their production quotas. Iraq, Kazakhstan and the United Arab Emirates are previous offenders. OPEC can use diplomatic pressure, but has no legal authority to enforce quotas.
