The following blog is distilled from an interview on the CBC’s “The Eyeopener,” hosted by Loren McGinnis who interviewed Enverus Intelligence® Research’s very own Al Salazar. Click here to listen to the full radio segment.
With Brent hovering around $75, global oil markets have been a rollercoaster ride in recent months. A war in the Middle East and escalating strike and counterstrikes between Israel and Iran are center stage. At any moment, the next escalation could create a knee jerk reaction in the market that sends prices temporarily higher.
Meanwhile, the world’s second largest economy is struggling to regain traction. August fears over China’s economy cooled, following stimulus announcements only to fall again on the details of the new incentives. China’s rollercoaster ride that is also pushing and dragging oil prices along with it.
While the consensus is forecasting $75, Enverus is looking for $85 Brent in Q4 into 2025. From geopolitics and Chinese demand to global strategic reserves, let’s delve into the rationale that defies the consensus.
Overemphasis on Plunging Demand in China
The world’s largest consumer of oil has hit many speed bumps that have slowed economic growth and sent housing markets into mayhem. The net effect is a decline in demand especially as manufacturing slacked off. Yet between manufacturers scrambling for business by lowering customer costs and active intervention from the Chinese government, the demand downside is less alarming than it appears on the surface.
In September, China launched what has been the first of a few stimulus measures to date to help spark its economy and real estate market. This included a $70 billion swap facility and rate cuts for existing homes, not just new mortgages. The intended effect scored an explosive 20%+ stock market rally. Given these pragmatic moves and lack of capitulation, Chinese demand is likely to remain relatively stable with an upside for growth.
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Low Inventory in Strategic Reserves
Another component influencing our $85 Brent forecast is the current state of global inventories. History suggests Brent prices should be around $85/bbl at current stock levels. Specifically, stock levels are relatively low across countries in the Organization for Economic Cooperation and Development (OECD), which includes the U.S., Japan, Canada, Australia, Mexico, France, Norway and the United Kingdom. OECD inventories are about what they were when Brent was at $90/bbl last year.
Having struggled to refill the Strategic Petroleum Reserves (SPR) by both the Biden and Trump administrations, it is currently half full or half empty depending on the level of optimism. And while oil prices have tended to end lower after six months of depleting the SPR, the usual shock absorber in the form of increased Saudi oil production may be absent if exports from the Persian Gulf are blocked, making higher prices more likely.
Maintaining stricter OPEC production targets is also bringing clarity to the supply picture with the major over producers being reigned in following OPEC’s last meeting.
Forecasting a Big “What if” Scenario
Anticipating oil prices must also take into account major geopolitical events, as undesirable as they are. The deepening and broadening tension in the Middle East has led Israel to commit to a counterattack following Iran’s missile assault in October, which itself was billed as a counterattack.
With the “nuclear option” literally off the table for now, Iran’s substantial petroleum exports are likely in the crosshairs. By funneling 90% of the country’s oil exports through a single facility, Iran has effectively put all their eggs in one basket. With $85 Brent the base case, the market would likely see an immediate 10% to 15% spike depending on the damage.
Iran would then be compelled to reciprocate, most likely by closing the Strait of Hormuz. In anticipation, insurance and options are also pricing in a high geopolitical premium.
So, what else is shaping the future of energy prices? Be sure to read our latest blog on the implications of the US presidential election for the energy industry.
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About Enverus Intelligence®| Research
Enverus Intelligence® | Research, Inc. (EIR) is a subsidiary of Enverus that publishes energy-sector research focused on the oil, natural gas, power and renewable industries. EIR publishes reports including asset and company valuations, resource assessments, technical evaluations, and macro-economic forecasts and helps make intelligent connections for energy industry participants, service companies, and capital providers worldwide. See additional disclosures here.
