Published on
Thursday, February 29 2024
Authors :
Sanjay Bhatia
There have been no shortage of geopolitical and market fundamental factors that have helped define the oil markets over the past few years. From the Russia-Ukraine war to the post-COVID oil demand surge, the oil market has been in a state of constant volatility. In today’s blog, we look ahead and discuss five factors that could significantly impact the oil market in 2024.
Global Product Demand
Product demand is expected to increase between 1 to 2 MMBPD each year in 2024 and 2025, which is lower than the 2 to 3 MMBPD growth we experienced the last two years. Historically, population and GDP growth have been the major factors driving demand. In recent years, the U.S. has avoided an oft-speculated recession due to high inflation and interest rates, while the EU is starting to see one. The U.S. Federal Reserve, and other central banks have paused rate increases, and there is growing discussion of rate cuts on the horizon in the next year. China is no longer expecting double-digit economic growth but still remains a fast-growing economy. The world’s overall economic engine is slowing, but that perennial prediction has been elusive the last few years. Is demand growth still to the upside?
Global Crude Supply
Saudi Arabia recently suspended expansion plans for production increases, but OPEC+ production cuts leave Saudi Arabia and the UAE with over 3 MMBD of spare production capacity combined. Existing lower OPEC+ production targets are set to expire at the end of 2024. West Texas shale production has a been a major source of crude growth, which is expected to continue, but the pace is uncertain. West Texas producers have demonstrated capital discipline recently, favoring increasing efficiency of existing wells over drilling new wells. Guyana offshore production, along with Brazilian output are anticipated to grow significantly. Significant crude production increases are possible, but will these volumes exceed expectations or disappoint?
Dos Bocas and Dangote Refinery Startups
The Dos Bocas Refinery (Mexico) could fully startup in 2024 with a processing capacity of 340,000 barrels per day. The refinery is designed to run the heavy sour Maya crude, which is already seeing production decline. These factors may sharply curtail export barrels to the USGC and elsewhere. The Dangote Refinery (Nigeria) has a design capacity of 650,000 barrels per day and has purchased barrels of Bonny Light and WTI, thus creating new demand for light crude. Both refineries are expected to help supply local product demand, while trading on global markets.
The nearly 1 million barrels per day combined additional refinery capacity will help meet growing global product demand, but both refineries have already faced delays due to construction issues. How quickly will these refineries start up and how reliably will they operate?
Global Shipping System
Recent geopolitical tensions and attacks have further stressed an already tight global shipping system. Growing tensions in the Middle East have further impacted global shipping, especially since transit through the Red Sea became critical to global oil trade flexibility after the Russian invasion of Ukraine. Attacks on vessels passing through the Red Sea have forced tankers and cargo ships to detour around the Cape of Good Hope (Southern Africa). This 4,000-mile detour has effectively reduced global shipping capacity by almost 10%.
Shipping costs for Asia-Europe shipping routes have increased over 300%, while rates from China to the U.S. have increased over 100% as the system rebalances. Further escalations in attacks could have immediate impacts on the market. However, new container ships ordered during the pandemic will continue to enter service and could help relieve pressure on the shipping system.
Trans Mountain Pipeline Expansion Project (TMX)
The TMX project aims to expand Canada’s oil pipeline transportation infrastructure by delivering an additional 590,000 barrels per day of mostly WCS crude to the Westridge Marine Terminal near Vancouver, British Columbia. The project also includes replacing an old, undersized dock, with three new loading berths, which eventually could allow the loading of one Aframax sized vessel per day.
Recent construction delays have pushed the startup timeline to mid-2024. Once online, TMX will increase heavy crude availability to Asian and U.S. West Coast markets. Meanwhile, the USGC may see increased price pressures on heavy crude barrels due to the TMX expansion, along with the Dos Bocas refinery startup potentially removing heavy Maya barrels from the region, with implications for light-heavy crude differentials.
Other Areas We’re Watching
Energy Policy
In the U.S., the Biden administration has been addressing climate change through executive orders and regulations, which have the potential to be reversed by future administrations. The EPA’s denial of small refinery exemptions for RFS waivers was recently struck down by the Courts and could serve as a basis for future challenges to EPA rulings. CAFÉ standards proposed in 2023 would require automakers to produce 60% EVs by 2030 and 67% by 2032, but the final regulation is now expected to increase stringency more gradually. The Inflation Reduction Act and Bipartisan Infrastructure Act combine to accelerate the transition to lower carbon energy and EVs, but the required rule making continues to drag implementation of several programs.
In 2024, 64 countries are holding national elections, representing 49% of the world’s population. COP 29 in Azerbaijan later this year is expected to focus on financing the energy transition in the developing world. The outcome of these elections could drive legislation and regulations designed to impact the pace of the energy transition and the level of global cooperation.
EV Penetration
Recent stories highlight challenges of growing EV sales in the U.S., including high prices, low or even negative margins for automakers, and inadequate charging infrastructure. Despite these challenges, over one million battery electric vehicles (BEVs) were sold in the U.S. in 2023, accounting for 7.3% of total vehicle sales. In 2024, EV sales are projected to continue growing.
In any given year, the incremental impact of EV sales on transportation fuel demand will be relatively small. As EVs become a growing share of the on-road vehicle fleet over time, the cumulative effect on fuel demand may become significant.
Summary
Overall product demand is expected to slow, but the global economy has exceeded expectations in the last couple of years resulting in higher demand than anticipated. Crude oil supply growth could bring new barrels to the market, but how much depends on producers’ capital restraint. The Dos Bocas and Dangote refinery startups will impact global product supply and refinery margins, while bringing much needed refinery capacity online. The timing of new refining capacity additions after these major projects, to meet rising crude demand, is uncertain. Further disruptions to the global shipping system, particularly in the Red Sea, could have immediate ripple effects, impacting both oil trade and shipping costs. The TMX pipeline will enhance Canadian crude transportation capacity, with impacts on the global heavy crude market. The interactions of these factors will be key drivers of how the oil market evolves across 2024.
Turner, Mason & Company has just released its Spring 2024 Crude and Refined Products Outlook (CRPO) which analyzes the supply, demand, and pricing of the crude and refined products markets. CRPO further delves into the factors outlined above to assess their impact on the oil market outlook. The Outlook also discusses developments in the fuels regulatory environment and how future RFS compliance costs and global refinery capacity additions are expected to impact refining profitability. For more information about CRPO or interest in subscribing, please reach out to Cindy Parker at cparker@turnermason.com.
