For about two months now, signals from the oil market have pushed traders from one extreme to the other, as headwinds collide with headwinds as the global economic slowdown thwarts fears of a shortage. Over the past two weeks, the swing has widened dramatically as concerns over a slowing global economy and fears of an oil or fuel shortage escalate. As a result, the oil market has become a very confusing place.
Earlier in October, for example, the International Monetary Fund issued a stark warning about the global economy. In this document, the economic adviser and director of research of the IMF, Pierre-Olivier Gourinchas, wrote that “The 2023 slowdown will be broad-based, with countries accounting for around a third of the global economy poised to contract this year or next.
The three largest economies, the United States, China and the Eurozone will continue to stall. Overall, this year’s shocks will reopen economic wounds that were only partially healed after the pandemic. In short, the worst is yet to come, and for many people, 2023 will look like a recession.
Naturally, such a forecast is rather bearish for oil, but at the same time there were warnings about the state of the diesel market. US stocks of distillate fuels are at record highs, demand remains robust and an impending EU embargo on Russian fuels are all contributing to the shortage, the root cause of which was reduced refining capacity in Europe and the United States. United States and the faster-than-expected rebound in demand from the pandemic shutdowns.
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It becomes worse also during the day. CNBC called it’s a perfect storm, with low inventories combined with growing demand ahead of winter, which is a recipe for even higher prices that spill over into all industries and hit consumers’ already empty pockets.
Ultimately, therefore, the diesel crisis should also be bearish for oil demand, but only in theory. Diesel drives economies. The destruction of demand will only appear when the supply situation becomes catastrophic, which will certainly imply a plunge into recession. Yet even then, demand destruction would be limited – like oil, its derivatives are quite price inelastic.
The latest figures on institutional trades are eloquent. John Kemp of Reuters writing that while the big speculators made two big crude buys in the last four weeks, at 62 million barrels and 47 million barrels, and then made two big sells, at 34 million barrels and 50 million barrels during of the same period.
OPEC on the other hand raised its long-term oil demand forecast and once again reiterated its calls for new investment in fossil fuels, just days after the IEA said oil and gas demand was on the verge of peak in a few years as we expand wind and solar capacity.
“The total number of investments for the oil sector is 12.1 trillion dollars until 2045,” OPEC Secretary General Haitham Al Ghais said at the ADIPEC conference in the United Arab Emirates, quoted by Reuters.
“However, the chronic underinvestment in the global oil industry in recent years, due to industry downturns, the COVID-19 pandemic, as well as policies focused on ending funding for fossil fuel projects , is a major cause for concern.”
This means that the future supply of oil in volumes corresponding to the demand is not at all guaranteed. Neither is wind and solar construction due to an impending copper shortage, which of them mining frames have warned over the past two weeks will be severe. Additionally, Indonesia is considering an OPEC-like organization for battery metal miners, which would make the energy transition supply chain even more difficult.
Investments in new oil production also do not appear aligned and ready to start under peak demand scenarios. This suggests that the oil market will remain an extremely uncertain place for the observable future or at least until countries that are expected to fall into recession do so.
By Irina Slav for Oilprice.com
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