On the supply side, the election of Donald Trump has reshuffled the cards and left investors in the dark. If, just after the election, many investors were convinced that under the Trump administration, American production would increase significantly, today it appears, as we anticipated in that investors changed their minds in the face of technical difficulties and the lack of enthusiasm of oil companies to drill at all costs. Therefore, the disappearance of this factor which had weighed negatively on prices contributes to the current rebound.
The election of Trump does not only have impacts within the American oil industry, it also influences other producers. Indeed, the new American president’s stated desire to increase sanctions against Iran raises fears of a substantial drop in Iranian production and its exports. During Donald Trump’s first term, Iranian production decreased by around 2 million barrels per day (Mbd) (from 3.8 Mbd to 1.8 Mbd), or around 2% of world production. This drop would mainly impact China, which buys Iranian oil at a substantial discount compared to world prices.
OPEC+ remains committed to quotas
Another element that has caused a change of view on the part of investors concerns OPEC+ production expectations. Indeed, the consensus was counting on a clear increase in the production of cartel members linked to unused production capacities exceeding 5Mbd. In addition, a certain weariness seemed to be emerging among the member countries which showed a desire to increase their production. However, it seems that between September and December they changed their minds and currently remain very attached to a strict quota policy.
This change has also had an upward impact on prices, since it means less oil available. These changes in the analysis of fundamentals have caused a change in the behavior of short-term investors. In fact, since the fall, the latter had taken “selling” positions, accentuating the fall in prices. In December, the change in opinion on fundamentals caused a sharp increase in “long” positions, which mechanically fueled the rise. It is likely that all of these elements are medium-long term elements which have a lasting influence on the price of black gold.
If expectations on supply have changed significantly, expectations on demand have not been left behind. In the third quarter of 2024, the latter found themselves on a downward trend, which weighed on prices.
Chinese imports that are holding up better than expected
The main variable influencing demand is Chinese consumption and associated imports. Indeed, even if China is the second largest consumer with around 13 million barrels per day, far behind the United States which consumes 20 million barrels per day, it is the first importer with nearly 9 million barrels per day.
This appetite therefore makes the Middle Kingdom an essential player. However, since the start of 2024, doubts have arisen about the growth of Chinese consumption. Indeed, over the last ten years, growth in Chinese consumption has been nearly 0.6 Mbd, compared to average growth in global production of 1.3 Mbd. China therefore absorbs half of global growth.
However, recently, it appeared that this growth in consumption was tending to slow down due to less dynamic economic activity and lower gasoline consumption due to a high penetration rate of electric cars, a car in two sold in China being an electric vehicle. However, the growth in sales of electric vehicles has stalled, with consumers preferring hybrids. From then on, doubts arose about the drop in gasoline consumption; which represents 60% of the consumption of petroleum products.
These doubts, combined with announcements of support for the Chinese economy, pushed investors to reconsider their views on future demand. So, they have become more optimistic about demand growth thanks to China, but also thanks to India. Indeed, the country imports around 5Mbd and shows growth in its imports of 2 to 3% for 2024. This pace should be confirmed in 2025, making India the most dynamic country in terms of growth in oil imports. This new Indian dynamic should stimulate demand more than anticipated.
Reconfiguration in progress
In conclusion, investors, both long term and short term, have recently been surprised by the reconfiguration of the fundamentals of black gold on the supply side and the demand side. Pessimism about Chinese demand has given way to more optimism, linked to a more dynamic economy than expected and lower-than-anticipated growth in sales of electric vehicles. In addition, the market is finding a new growth engine across India.
On the supply side, the election of Donald Trump has reshuffled the cards, but his desire to produce more in the United States seems to come up against oil companies reluctant to increase their production. Added to this is the risk of stronger sanctions against Iran, causing a substantial reduction in its production. All this pushes investors to anticipate less growth in American production. Likewise, OPEC+ seems to remain on its strategy of not excessively increasing its production, thus supporting prices. Therefore, supply should not be as dynamic as anticipated in September.
The combination of all these elements explains the recent rise in crude prices. However, we must keep in mind the fragility of these expectations, which can quickly turn around and cause volatility in the markets.
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