FACTORS THAT WILL DETERMINE OIL PRICES IN 2025

In the oil sector, 2024 has been characterized by chronic pessimism among traders regarding Chinese demand and chronic downplaying of the risks of supply disruptions. This has provided a fairly stable year for prices, and this stability could continue into 2025 if certain conditions are met.

Brent and West Texas Intermediate crude look set to end the year roughly where they started the year. WTI started 2024 just above $70 a barrel and is on track to end it just below that level. Brent crude looks set to take a bigger hit, starting the year at $77 a barrel and ending the year just above $74 as of this writing.

The biggest reason for this somewhat unnatural stability in oil prices has been the intense focus on China. Every oil price report this year has been dominated by either the Chinese economy or oil import data. This trend will continue in 2025 amid a flurry of reports predicting a spike in oil demand growth for the world’s largest importer.

China’s own state-owned oil giants are talking about it. Earlier this month, CNPC said it expects oil demand growth to peak in 2025, moving the peak year from 2030, which was expected to be in 2023. The company cited the adoption of electric vehicles and the growth of LNG-powered trucks as reasons for its forecast, although a record share of electric vehicles in total vehicle sales this year has failed to reverse China’s rising oil demand.

Next up was Sinopec, which a week ago released a report saying China’s oil demand growth will peak in three years, in 2027. The peak would be at a daily demand level of 16 million barrels, or 800 million tons, China’s state-owned oil company said. A year ago, Sinopec forecast that Chinese oil demand would peak at around 800 million tons between 2026 and 2030. Sinopec now projects that China’s oil demand will hit 750 million tons this year.

The focus on China and pessimism about its demand have kept prices low this year and will likely continue to do so in 2025 unless all the stimulus Beijing is pumping into the economy translates into higher demand for the key commodity. As an analyst at brokerage firm Pepperstone told the Wall Street Journal: “Behind the apparent calm in the oil market is a complex interplay of macroeconomic factors that could cause sharp moves at any time.”

“The focus is on the dynamics of the macroeconomic data and future decisions by OPEC+ that will determine the direction of the market in the coming months,” Quasar Elisundia told the WSJ. In terms of macroeconomic data, the focus will continue to be on China, as well as India, which is emerging as the next major driver of global demand.” Thus, according to a recent forecast by S&P Global Commodity Insights, India’s oil demand growth rate this year will outpace China’s.

“India, along with Southeast Asia and other parts of South Asia, will be the main driver of future oil demand growth in the region,” said Kang Wu, head of macroeconomic and oil demand research at SPGCI.

But even in weaker-growth markets like the European Union, oil demand continues to rise, as import data shows. The latest data for the second quarter of this year shows a decline in natural gas imports and an increase in imports of what the EU classifies as “petroleum oils.” The EU is not the oil market that traders turn to for information on demand trends, but that may be an oversight.

On the supply side, the focus remains on OPEC+, of course, although analysts keep repeating that they expect major production increases from major non-OPEC countries like the US, Guyana, Canada, and Brazil. However, when it comes to the US, those expectations have begun to fade, as the industry has repeatedly made it clear that drilling won’t happen just because there’s a pro-oil president in the White House.

The situation with OPEC+ is quite similar. Forecasters have been keeping traders on edge and bearish for months, reminding them of all the spare capacity OPEC could bring back into service if it decides to scale back its production cuts. At the same time, they consistently forget to mention that OPEC and its OPEC+ partners have made it clear from the start of the production cuts that production will only resume if prices rise sufficiently. Essentially, this means that several price spikes this year have been the result of unrealistic expectations that have nothing to do with oil fundamentals.

In the current environment, fundamentals appear to be largely balanced. Many are expecting a supply glut next year, but that is based on assumptions about electric vehicle adoption that have consistently disappointed. Trump’s sanctions on Iran could further tighten supply in the Middle East and boost prices, but there is a chance that the idea of ​​a large reserve of 5 million barrels per day or more could again act as a buffer against a market implosion.