Leading American credit rating agency, Fitch Ratings, has reported that geopolitical instability in the Middle East, upcoming elections in scores of countries as well as increasing regulatory uncertainty are the top risks for most commodities including oil and gas, copper and defensive commodities such as gold in 2024.
Commodity experts at Standard Chartered have argued that markets are seriously discounting geopolitical risks likely due to weak oil demand in the month of January. The analysts appear to have been right on the money with the latest global inventory data showing that oil markets are tighter than expected. According to StanChart, there’s been a January inventory draw in only three years since 2004, with the month averaging a build of 1.2 million barrels per day (mb/d). January 2023 recorded a huge 3.4 mb/d surplus; the third largest surplus in any month over the past 20 years. Only two Januaries, both at the start of the pandemic, posted bigger numbers. StanChart has put this year’s January surplus at just 0.3 mb/d, much smaller than average.
The Israel-Hamas war has been raging on for 130 days now with Israel currently facing strong international pressure to cease bombardment of the southern Gaza city of Rafah. Israeli Prime Minister Benjamin Netanyahu has, however, continued pushing back, saying “total victory” is possible in Gaza within months. Netanyahu has ordered his troops to prepare for expanded ground operations and has vowed to defeat Hamas gunmen hiding in Rafah. Yemen’s Houthi rebels have continued attacks on commercial ships in the Red Sea despite multiple counterstrikes by the U.S. and British navies. Many insurance companies have declined to do business with ships plying the troubled waters while other war underwriters are charging ships linked to U.S, British and Israeli companies as much as 50% extra in war risk premiums. Related: As U.S. Pauses New LNG Project Permits, Iran Moves Full Ahead On Its Own
The current year has been dubbed ‘The Super Election Year’ with the United States, India, Mexico and Indonesia, among other countries, heading to the polls later in the year after Taiwan and Bangladesh did the same in January. Europe will also hold a supranational election this summer with citizens of 27 European Union countries voting for a new European Parliament. The U.S. elections will be among the most closely watched, with a Trump win likely to upturn U.S. domestic and foreign policy. Republicans have always been pro-fossil fuels, and Trump as president would likely seek to boost the domestic oil and gas sector, expand federal land access and lower taxes. In contrast, Trump has never hidden his disdain for renewable energy. He has lambasted Biden’s historic Inflation Reduction Act, describing it as the “biggest tax hike in history’’ thanks to its generous subsidies and tax breaks for clean energy. That said, even as president, Trump is unlikely to be in a position to roll back the law unilaterally; however, he could make its “implementation more difficult”, as Shannon Rinehart, portfolio manager at Threadneedle, has pointed out.
A second Biden term could see him double down on his pro-clean energy policies; however, he would likely face even deeper legislative gridlock if Republicans gain control of at least one house of Congress. Biden is likely to pursue climate policies even more aggressively in his final term. However, contrary to widely held expectations, we have previously pointed out that the fossil fuel sector has actually thrived under Biden with U.S. oil, natural gas and LNG production at all-time highs. Meanwhile, oil and gas stocks have collectively doubled during the time Biden has been in office while clean energy stocks have declined 60%.
Regarding regulatory risks, last week, we reported that we expect the United States massive LNG buildout to proceed despite the recent freeze on new LNG projects by the Biden administration. Earlier, Energy Intelligence had predicted that ~69 million tons per year of LNG would reach Final Investment Decision (FID) in 2024, making it the most significant year for FIDs since 2019, when more than 70 million tons/yr was sanctioned. Obviously, the LNG freeze means that won’t happen in the current year; however, we expect the LNG momentum to continue under the next government regardless of who wins the White House.
“The decision will not affect our forecast for U.S. LNG exports out to 2028, but after that it could affect the trajectory and pace of the sector’s growth and have potential to tighten the market in the long run,” Giles Farrer, head of gas and LNG asset research at Wood Mackenzie, has told the Financial Times.
Bulls Vs. Bears
And now some bad news for the bulls: Fitch Ratings has also predicted that large spare OPEC+ capacity of over 5 million barrels of oil is likely to dampen the oil price rally.
Wall Street is really divided on oil fundamentals. A few weeks ago, HSBC Global Research issued an outlook quite similar to Fitch’s, predicting that spare production capacity by OPEC+ is big enough to keep Brent crude prices range-bound at $75 per barrel to $85 per barrel in the mid-term. According to the analysts, OPEC+’s spare production capacity will increase to 4.5 million b/d at the end of 2024, up from 4.3 million b/d at the end of 2023, enough to dampen price spikes. Additionally, HSBC has pointed out that OPEC+’s production cuts are losing their edge mainly due to surging production from non-OPEC members, especially the United States.
Standard Chartered has countered by pointing out that the U.S. is unlikely to allow Iran to continue pumping so much oil due to its support for anti-western militants and also argued that U.S. oil production is likely close to a peak, for now. Iran’s oil production has surged to more than 3 million barrels per day under Biden from under 2 million barrels per day under Trump. Meanwhile, StanChart has predicted very little incremental growth in U.S. crude oil supply in the current year, saying growth will decelerate strongly and even turn negative in December 2024 from above 1.2 million barrels per day (mb/d) in December 2023.
OPEC has also weighed in and has predicted that global oil demand growth will far outpace non-OPEC supply growth over the next two years. OPEC sees global demand growth clocking in at 2.25 million b/d in 2024 and 1.8 million b/d in 2025, well above non-OPEC supply growth at 1.34 million b/d in 2024 and 1.27 million b/d in 2025.
By Alex Kimani for Oilprice.com
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