Just a month ago, headlines in the energy sector painted a picture of surplus oil supply coupled with sluggish Chinese demand. Today, the narrative has shifted dramatically, with growing discussions of a potential supply deficit. This shift follows the Biden administration’s final sanctions package targeting Russia, which sent ripples through the global oil market.
John Kemp, a prominent energy analyst, recently highlighted the swift depletion of U.S. crude oil inventories since mid-2024. Historically, such declines point to robust demand, and this year is no exception. Despite cautious forecasts by the U.S. Energy Information Administration (EIA), domestic demand has shown resilience, even setting a seasonal record in spring 2024. That record, which exceeded the EIA’s weekly estimates by 800,000 barrels per day (bpd), left market analysts unsettled.
The story of tightening inventories is not limited to the United States. Crude stockpiles in the Organization for Economic Cooperation and Development (OECD) have also been depleting faster than anticipated. The International Energy Agency (IEA), like its U.S. counterpart, has repeatedly underestimated the delicate balance between global oil supply and demand.
Sanctions and Market Impact
The Biden administration’s sanctions against Russia have further underscored the fragility of the surplus narrative. In a truly oversupplied market, such sanctions would have minimal impact on prices. Instead, the sanctions triggered noticeable movements in international benchmarks, raising questions about the actual state of global supply.
The IEA had predicted in November that crude oil supply in 2024 would outpace demand by as much as 1 million bpd, even if OPEC+ maintained its production caps. By January, the agency acknowledged a possible supply draw but refrained from forecasting a deficit outright.
“If decreases in supply from weather impacts, sanctions, or other developments become substantial, oil stocks can quickly be drawn to meet operational requirements in the near term,” the IEA noted, citing Russian sanctions, potential new Iranian sanctions, and seasonal demand spikes. However, the IEA did not address former President Trump’s plans to refill the Strategic Petroleum Reserve, a move that could drive prices higher unless handled cautiously by the incoming administration.
Production Uncertainty and Market Sentiment
The prevailing narrative suggests that non-OPEC supply, led by the United States, would surge sufficiently to offset OPEC+ production cuts. Yet, U.S. oil majors have repeatedly signaled reluctance to expand production aggressively—a fact overlooked by many analysts but closely monitored by traders.
John Kemp reported a surge in bullish bets on crude oil, with speculative purchases amounting to 330 million barrels across six major contracts in just five weeks since December 10. By mid-January, total speculative exposure reached 553 million barrels, the highest level since April 2023. This reflects traders’ expectations of tighter supplies stemming from sanctions on Russian and Iranian crude.
However, optimism in the market has faced interruptions. This week, oil prices dipped following President Trump’s declaration of a national energy emergency and a series of executive orders aimed at boosting U.S. oil and gas production. The EIA maintained its bearish stance, reiterating that strong global production growth coupled with slower demand growth would exert downward pressure on prices.
Aramco’s Optimism and Revised Demand Growth Forecasts
Saudi Aramco’s leadership remains bullish despite recent price fluctuations. At the World Economic Forum in Davos, Aramco CEO Amin Nasser predicted oil demand growth of 1.3 million bpd in 2024, potentially reaching an all-time high of 1.6 million bpd. The IEA also adjusted its demand growth forecast upward from 940,000 bpd to 1.05 million bpd, attributing the revision to improved global economic prospects.
Notably, these forecasts contradict the notion that the energy transition is dampening oil demand—a claim frequently made by the IEA and others.
The Uncertain Path Ahead
While bullish bets and revised forecasts suggest optimism, risks to oil prices remain. A significant factor is the possibility of the Trump administration removing U.S. sanctions on Russia. If this happens, it could flood the market with supply, neutralizing any impact of sanctions on Iran. However, the likelihood of such a policy shift remains uncertain.
For now, global oil supply remains constrained, and production growth forecasts are as uncertain as the geopolitical landscape. The interplay between demand, supply, and policy will continue to shape the oil market in the months ahead, leaving both analysts and traders navigating an unpredictable terrain.