What's next for oil prices?

How are world economies affecting oil prices and the demand for oil?

Oil pump on a sunset background. World Oil Industry
(Image credit: Anton Petrus)

Despite a “widening war” in the Middle East and the Opec cartel’s “best efforts” to cap supply, oil prices just keep on falling, says John Rapley for UnHerd. Brent crude recently touched a near-three-year low below $70 a barrel. It picked up slightly on renewed Middle East tensions this week, but, trading around $72 a barrel, oil remains down by more than a fifth over the past 12 months. Blame the stagnation on weakening demand from the “three big beasts” of the world economy – North America, Europe and China – which may “signal a looming recession”. There are also structural forces at work. 

China, in a quest for energy security, is pivoting away from oil at a quicker pace than expected. China’s rollout of liquefied natural gas (LNG) has “already displaced” roughly 8% of domestic demand for diesel, says David Oxley of Capital Economics. Add in the shift to electric vehicles and it seems that a decent chunk of global oil demand is not coming back. But in the short-term “bigger question marks hang over supply”. Opec+ (a grouping of producers led by Saudi Arabia and Russia) is collectively holding more than five million barrels per day (mbpd) in spare production capacity off markets to prop up prices. 

But this is patently not working. With “tensions” rising inside the alliance, there is a possibility of the group changing tack and ramping up supply – as happened in 2020. Big oil-price falls would be likely to follow. Analysts have spent most of the year “confident that prices would hold somewhere around $85 per barrel”, says Lukanyo Mnyanda in the Financial Times. But “bearish bets by hedge funds” now suggest that $60 is more likely.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

How is demand affecting oil prices?

The International Energy Agency (IEA) forecasts “comfortably supplied oil markets” for the rest of this decade. There will be strong demand growth from aviation and emerging economies such as India, but that will be offset by electric-vehicle uptake, more use of renewables and rising fuel efficiency. Running at 102 mbpd last year, global demand for oil will level off near 106 mbpd by the late 2020s. Meanwhile, supply is rising steeply in the US and other non-Opec producers. With forecast supply of 114 mbpd by 2030, the IEA predicts “levels of spare capacity never seen before” except during Covid. 

The oil bulls haven’t been wholly routed. Goldman Sachs Research doesn’t see demand for oil peaking until 2034, and then at a higher 110 mbpd. “We think peak demand is another decade away“, and that thereafter demand will plateau, rather than fall sharply, for another few years, say analysts Nikhil Bhandari and Amber Cai. World demand for petrol will peak around 2028, but rising demand for petrochemicals from emerging markets “could more than offset the gasoline demand decline through 2040”.


This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Contributor

Alex Rankine is Moneyweek's markets editor