Despite some strengthening of crude prices over the last few days on account of the heating up of the Russia-Ukraine war, pressure has been building up on the oil markets from all directions. A guessing game is thus on. How would the crude markets behave in the New Year? It may be too early to pass a judgment.

Investors are fretting over weaker Chinese demand and a potential slowing in the pace of US Federal Reserve interest rate cuts, Reuters reported. For the last two decades, China has been the global growth engine, as far as global oil consumption is concerned. That is now changing.

US President-elect Donald Trump has pledged to end China’s most-favoured-nation trading status and impose tariffs above 60 per cent on Chinese imports — much higher than those imposed during his first term.

“The headwinds out of China are persisting, and whatever stimulus they put forward could be damaged by a new round of tariffs by the Trump administration,” Reuters quoted John Kilduff, partner at Again Capital.

Oil prices may see a drastic fall if Opec+ unwinds its existing output cuts, Chinese demand remains weak, and the Fed slows down rate cuts

Adding to the uncertainty, stronger-than-expected US retail sales in October suggest the American economy is gaining strength. While this is positive for US growth, it has triggered fears that the Federal Reserve could slow its pace of interest rate cuts, putting additional pressure on oil markets.

The stance of US President-elect Donald Trump on the ongoing Russia-Ukraine war is also taking off some war premiums from the oil markets.

Reports by CNN that Hezbollah is also weighing a ceasefire proposal that would end the ongoing Israeli offensive in Lebanon also helped deflate the risk premium further.

However, with the Russia-Ukraine war theatre heating up last week, some war premium was added back to the oil markets. Yet, that may not last long, especially once President-elect Trump takes office on January 20, 2025.

And amid all these, the International Energy Agency (IEA) is saying global oil markets face a surplus of more than one million barrels a day next year. Oil consumption in China — the powerhouse of world markets for the past two decades — has contracted for six straight months through September and will grow this year at just 10pc of the rate seen in 2023, the IEA said in its November monthly report.

The global glut would be even bigger if the Organisation of the Petroleum Exporting Countries (Opec) and non-OPEC oil producers (Opec+) decide to press on with plans to revive halted production when it gathers next month, the IEA underlined.

The IEA head of oil industry and markets Toril Bosoni attributes the slowdown to several factors, including the adoption of electric vehicles, high-speed rail, and the use of gas in trucking. “It’s not just the economy and the slowdown in the construction sector,” Ms Bosoni told Bloomberg TV.

Amid this extended weakness in Chinese demand, crude prices have retreated 11pc since early October despite ongoing hostilities between Israel and Iran. The decline foreshadows a “well-supplied market in 2025,” the IEA added. The agency predicts that additional supplies from the US, Brazil, Canada, and Guyana will grow this year and next by 1.5m barrels a day, which will add additional pressure on oil markets.

With President-elect Trump touting a “drill baby drill” policy and vowing to cut energy prices in half, expectations of higher oil production by the US in the coming months are also growing. Belatedly, Opec also seems to recognise the slowdown in demand. In four consecutive monthly downgrades, it has lowered its annual consumption forecasts by 18pc. Nonetheless, its projection of 1.8m barrels per day of growth remains optimistic.

Oil prices may see a drastic fall if Opec+ unwinds its existing output cuts. Market watchers are predicting a bearish year for crude oil. “There is more fear about 2025s oil prices than there has been since years — any year I can remember, since the Arab Spring,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service.

“You could get down to $30 or $40 a barrel if Opec unwound and didn’t have any kind of real agreement to rein in production. They’ve seen their market share dwindle through the years,” Mr Kloza added.

Given that oil demand growth next year probably won’t be much more than 1m barrels a day, a full unwinding of Opec+ supply cuts in 2025 would “undoubtedly see a very steep slide in crude prices, possibly toward $40 a barrel,” Henning Gloystein, head of energy, climate and resources at Eurasia Group, told CNBC.

Similarly, MST Marquee’s senior energy analyst Saul Kavonic posited that should Opec+ unwind cuts without regard to demand, it would “effectively amount to a price war over market share that could send oil to lows not seen since Covid.”

Signs are ominous. With the finance minister proclaiming that not many ‘friends’ are ready to roll over the payments due to them, this bearish crude outlook may provide some respite, some cushion, to Pakistan’s struggling balance-of-payments situation.

Published in Dawn, The Business and Finance Weekly, November 25th, 2024