IEA oil market report: navigating volatility amid global uncertainty

The global oil market has been nothing short of a rollercoaster ride in recent months. From sharp price drops to unexpected shifts in demand and supply, the industry is grappling with a myriad of challenges. The latest International Energy Agency (IEA) report stresses that the market is experiencing a period of significant turbulence, driven by both macroeconomic and geopolitical factors.

Global oil demand saw an increase of 870,000 barrels per day (kb/d) in the second quarter of 2024, but this growth was tempered by a notable contraction in China, which has been struggling with a downturn in industrial activity.

The IEA projects that oil demand will rise by less than 1 million barrels per day (mb/d) in both 2024 and 2025—a stark contrast to the robust 2.1 mb/d growth witnessed in 2023. This slowdown is largely due to lackluster economic drivers, particularly in China, where oil demand has been on a decline for three consecutive months.

Despite China's woes, there are signs of resilience in advanced economies. The United States, which accounts for a third of global gasoline consumption, has seen a recent uptick in demand, particularly for gasoline. This resurgence is largely attributed to the strength of the US service sector, which has kept miles driven at high levels. As a result, oil consumption in OECD countries flipped from a 300 kb/d annual contraction in the first quarter of 2024 to growth of 190 kb/d in the second quarter.

Supply side: OPEC+ and non-OPEC+ in a delicate dance

On the supply side, the world saw an increase of 230 kb/d in July, bringing total production to 103.4 mb/d. This rise was primarily driven by substantial increases from OPEC+ nations, which offset losses from non-OPEC+ producers. The IEA forecasts that annual supply gains will accelerate from 730 kb/d in 2024 to 1.9 mb/d in 2025. Notably, non-OPEC+ production is expected to rise by 1.5 mb/d in both 2024 and 2025, while OPEC+ output may decline by 760 kb/d in 2024 but potentially increase by 400 kb/d in 2025 if voluntary cuts remain in place.

OPEC+ has been walking a tightrope, balancing between maintaining production cuts and responding to market conditions. The group's Joint Ministerial Monitoring Committee (JMMC) recently reiterated that it could pause or reverse its decision to unwind cuts depending on market conditions. Despite the slowdown in Chinese demand, the global supply-demand balance suggests that inventories could build by an average of 860 kb/d next year, driven by significant non-OPEC+ supply increases, particularly from the United States, Guyana, Canada, and Brazil.

Refinery throughput and margins: a mixed bag

Global refinery throughputs are projected to increase by 840 kb/d to 83.3 mb/d in 2024, with a further increase of 600 kb/d to 83.9 mb/d expected next year. However, the refining sector is not without its challenges.

Margin weakness continues to weigh on processing rates, particularly in China, where refinery runs are expected to decline year-over-year. In July, margins fell further in Europe but saw gains in Singapore and the US Gulf Coast, driven by stronger naphtha and gasoline cracks.

This mixed performance in refining margins reflects the broader uncertainty in the market. As global oil inventories fell by 26.2 million barrels in June, following four months of builds totaling 157.5 mb, the pressure on refiners is mounting.

The decline in inventories was led by a 19.5 mb drop in OECD onshore stocks, partially offset by a 17.5 mb increase in non-OECD countries. This tightening of supply, particularly in crude oil, is creating a squeeze on refinery margins, which could lead to shifts in refinery activity in the coming months.

Price volatility: a rollercoaster ride

Brent crude futures experienced a significant drop of $6 per barrel during July, driven by a wave of weak macroeconomic data that spurred a broad risk-off sentiment across financial markets.

Concerns over the global economy, exacerbated by Japan's interest rate hike, China's deteriorating outlook, and slowing US hiring, contributed to the downward pressure on prices. However, geopolitical tensions in the Middle East and some positive economic data helped to stabilise the market, with prices rebounding in early August.

Despite the recent rebound, the market remains volatile. At the time of writing, Brent crude was trading at around $80 per barrel, down from its July highs. The persistent tightness in the Atlantic Basin market, fueled by OPEC+ cuts, has kept front-month time spreads resilient, even as flat prices have fallen.

Looking ahead: challenges and opportunities

As the global oil market navigates these turbulent waters, the outlook remains uncertain. While demand growth is expected to slow, particularly in China, supply-side dynamics, including OPEC+ decisions and non-OPEC+ production increases, will play a critical role in shaping the market's future. Refiners, too, will need to adapt to changing margins and inventory levels, potentially leading to shifts in processing activity.

In the face of these challenges, the oil market's ability to adapt will be crucial. Whether through strategic production cuts, shifts in refining activity, or responses to geopolitical tensions, the industry's resilience will be tested in the coming months. Meanwhile, all eyes will be on the key players—both at the production and consumption ends of the spectrum—to see how they navigate this complex landscape.