The global oil market is experiencing a notable shift, driven by various factors including geopolitical developments, economic indicators, and changing investor sentiments.
The World Economic Forum (WEF) has highlighted that the global economy is expected to improve or remain stable this year, despite potential risks from geopolitical and domestic tensions. According to the latest Chief Economists Outlook, 97% of respondents believe geopolitics will contribute to global economic volatility in 2024, with 83% pointing to domestic politics as a source of volatility. Despite these concerns, the report underscores positive signs in the US and Asian economies, driven by decreasing inflation and robust markets. Technological transformations, artificial intelligence, and the green energy transition are identified as key contributors to global growth, supported by looser or unchanged fiscal and monetary policies.
In the oil market, calm has returned following the massive disruptions caused by the coronavirus pandemic and geopolitical tensions. Production and consumption are growing at similar rates, inventories are near normal, and prices are close to average once adjusted for inflation. Brent prices have stabilized around $83 per barrel in May, aligning with the inflation-adjusted average since 2000. U.S. commercial crude inventories are only 5 million barrels below the ten-year seasonal average, while combined U.S. stocks of gasoline, distillate fuel oil, and jet fuel are 14 million barrels below the ten-year average. This balance in the market has led speculative investors to reduce their positions, redeploying capital to more promising markets such as power, gas, metals, and soft commodities.
In the U.S., diesel demand fell to its lowest seasonal level in March since 1998, with products supplied of distillate dropping by over 6% from February to 3.67 million barrels per day. This decline is attributed to sluggish manufacturing activity, milder-than-expected winter weather, and an increase in renewable fuel supply. Meanwhile, U.S. crude oil output rose to 13.2 million barrels per day in March, the highest since December, driven by increased production in Texas and New Mexico. Gross natural gas production in the U.S. Lower 48 states fell by about 3.0 billion cubic feet per day to 114.7 bcfd in March.
Despite the stabilization in the oil market, there are still potential disruptions on the horizon. The geopolitical tensions between Israel, Hamas, Iran, and the Houthis have not disrupted crude production, but the situation remains volatile. Ukraine’s drone attacks on Russian refineries and the ongoing conflict in the Middle East could still pose threats to global fuel supplies. However, current market conditions, with balanced production and consumption rates, have led to reduced volatility and a more predictable pricing environment.
Investor interest has shifted away from oil to other commodities, with hedge funds reducing their positions in petroleum futures and options. As of May 21, hedge funds held positions equivalent to 380 million barrels, down from 685 million barrels six weeks earlier. This move reflects a broader trend of investors seeking opportunities in markets with higher potential returns, such as industrial metals driven by the transition to a future energy system.
As we move forward, it is crucial to monitor these dynamics closely. The interplay between geopolitical events, production levels, and economic indicators will continue to shape the oil market. While the current balance suggests a period of stability, the underlying risks and shifts in investor sentiment could lead to significant changes in the months ahead. For now, the focus remains on navigating this complex landscape with an eye on both immediate market conditions and long-term trends.
