(WCTW) The Oil Market Is Too Bearish, Non-OPEC Supply Growth Will Disappoint In 2025
(WCTW) The Oil Market Is Too Bearish, Non-OPEC Supply Growth Will Disappoint In 2025
The consensus appears certain that 2025 oil market balances will be in surplus.
The beauty of the oil market is that sometimes the narrative can change fundamentals by pushing prices to the extreme. In 2022, the narrative following the Russian/Ukraine invasion was that Russia would lose ~3 million b/d, and the world was headed for an energy crisis. Natural gas prices in Europe were skyrocketing, and global coordination was needed to prevent a crisis. As oil prices soared past $100/bbl, the IEA coordinated a global SPR release (~260 million bbls) that ended up preventing the so-called crisis.
But for those who lived through that period, what became obvious at the beginning of the oil price surge was that oil demand would not hold at those prices.
On April 20, 2022, we published a piece titled, "Oil Demand Surprises To The Downside, What This May Mean For Prices." In the article, we said:
This is extremely disturbing and suggests that the recent spike in oil prices is already having a significant impact on consumer behaviors. In combination with other commodity prices spiking, we are already seeing a wave of slowing demand taking hold.
Fast forwarding to today's narrative, the market is confident that 2025 balances will be in surplus due to 1) low oil demand growth and 2) high non-OPEC supply growth.
While we are of the view that oil demand growth could remain muted in 2025, what's not being said is that low prices also fuel potentially higher demand, just as high prices destroy demand. Similarly, low prices will result in the supply side disappointing, while higher prices will incentivize more supplies.
If we look at consensus estimates from IEA, EIA, Morgan Stanley, Bank of America, Goldman, and others, the growth range for non-OPEC supply in 2025 is between ~1.5 to ~1.8 million b/d. At $68/bbl prompt, and ~$66/bbl average in 2025, non-OPEC supply won't see any growth.
One of the main reasons is that at $65/bbl WTI, we have US oil production averaging ~13 million b/d in 2025 down from the ~13.25 million b/d in 2024. I suspect the oil market is already starting to find that level where US oil production starts to decline. The question is now whether or not it wants to keep it at this equilibrium or blow it to an extreme.