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Unsurprisingly, Crude oil prices have ground upwards since the start of the year, primarily due to the daily Houthi attacks in the Red Sea shipping lanes. At the same time, the uptick in the geopolitical risk premium from a thickening Israel-Hamas conflict has likely added a few dollars to current prices, and those can quickly evaporate, plus more if we do nudge closer to a peaceful solution in the Middle East, which is our base case on a sooner rather than later view.

The global oil market is experiencing higher uncertainty regarding the balance between supply and demand. This uncertainty has contributed to global benchmark trading within a relatively tight range.

Despite ongoing geopolitical tensions and still robust U.S. macro, market participants are finding it challenging to gain clarity on the direction of the oil market in the near term.

Both global oil supply and demand trends show signs of sluggishness, adding to the complexity of predicting future price movements. As a result, market observers and participants may face continued uncertainty regarding the dynamics of the oil market in the coming weeks.

Global oil demand growth is anticipated to be lacklustre this year due to various factors, including sluggish economic conditions and increasing electric vehicle (E.V.) sales in China, which remains a significant driver of new incremental demand. As a result, projections from the International Energy Agency (IEA) suggest that global oil demand will only increase by 1.2 million barrels per day (mb/d) to reach 103 mb/d in 2024. This growth rate is notably lower than the 2.3 mb/d rebound observed last year following the pandemic-induced downturn. In contrast, OPEC's forecast of a 2.2 mb/d increase appears overly optimistic even if the Fed and ECB cut rates sooner than expected.

Likewise, the global oil supply is poised to decelerate this year following a 1.9 mb/d increase to 102 mb/d in 2023. The International Energy Agency (IEA) projects a more modest supply growth of 1.5 mb/d this year, with the United States, Brazil, Guyana, and Canada expected to contribute the bulk of new incremental output. Additionally, the production cut strategy implemented by OPEC+—resulting in over 5.5 mb/d of lost output—is anticipated to persist, with indications suggesting that some voluntary cuts, slated to conclude in April, may be extended. Notably, Saudi Arabia, which is reducing production by just over 3 mb/d, is likely to continue bearing the brunt of the production adjustments. This is partly driven by the kingdom's need for elevated oil prices to sustain its extensive, multi-year spending initiatives to diversify its economy.

Considering the typical high forecasting margin of error, the oil market appears poised to maintain relative equilibrium throughout the year.

However, when assessing the balance of risks to our forecast, we lean toward the downside, notwithstanding the lingering tail risk of severe disruptions in Middle East production. This bias reflects our view that global growth, and consequently global oil demand, is more likely to underperform expectations due to the challenges currently confronting the Chinese economy and the need for the Fed to persist in mitigating inflationary pressures. Moreover, a heightened possibility exists that global oil supply may exceed projections if U.S. shale producers continue to enhance drilling efficiency, notably by drilling longer horizontal wells. Additionally, tensions among OPEC+ members could resurface, potentially leading to increased supply despite Riyadh's efforts to bolster prices. Recent reports indicate growing reluctance among some cartel members to curtail supply further.

While oil markets seem stable at present levels, we anticipate that this equilibrium may not be sustained indefinitely. Given crude oil's historical price volatility, there is a possibility that prices will eventually break out of the current trading range. However, we acknowledge that we are uncertain about the direction of the next significant move due to the elevated level of uncertainty prevailing in the market. However, you will likely catch the drift of this note that we are skewed bearish.

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