Oil Prices Could Plunge to $50 as China Slows and Global Demand Falters
As the world’s oil traders and analysts gathered for the Asia Pacific Petroleum Conference in Singapore last week, the slump in oil prices and its future trajectory were at the forefront of everyone’s minds. The global economic landscape is shifting, and the oil market is reflecting this change. China, the world’s largest oil importer and second-largest consumer, has been experiencing a significant economic slowdown, with oil consumption contracting for the fourth consecutive month in July. This tepid demand, coupled with oversupply in the market, has driven US crude prices to their lowest point in over a year. The ongoing oil glut has also prompted OPEC+ members to postpone plans to increase production.
Key Takeaways:
- China’s economic slowdown is the primary driver behind declining oil demand, with consumption contracting for four months in a row.
- This sluggish demand, amplified by oversupply, has driven US crude prices to their lowest point in over a year.
- OPEC+ has postponed plans to increase production due to the persistent oil surplus.
- Experts predict that oil prices could fall to the low $60s per barrel within the next two years, with some even predicting a further drop to $50 per barrel.
- Uncertainty about the U.S. economy and the possibility of a recession are contributing to the bearish outlook on oil prices.
- While some analysts are looking towards India as a potential driver of oil demand growth, its consumption is significantly smaller than China’s, and experts note that it’s unlikely to offset the slowdown in China’s demand.
Oil at $50: A Realistic Possibility?
Daan Struyven, Goldman Sachs’ Co-Head of Global Commodities Research, believes that crude prices could fall to the low $60s per barrel level within the next two years if Chinese demand remains sluggish. He did not rule out an even steeper decline, suggesting that Brent crude could fall to roughly $50 per barrel in the event of a moderate recession in the US.
The US economy has displayed resilience despite high interest rates aimed at taming inflation. This resilience has slowed economic growth and raised recessionary concerns, even though Americans perceive the U.S. to already be in a recession.
"It’s hard to look beyond China when thinking about the supply and demand balance for next year," said Ben Luckock, Trafigura’s global head of oil. "I suspect we’re probably going to go into the 60s sometime relatively soon." With Global benchmark Brent currently trading at around $73 per barrel, and US West Texas Intermediate at $70.57 per barrel, these predictions suggest a significant downturn in the coming years.
Can India Step In to Fill the Gap?
With China’s slowdown, several analysts are looking towards India as a potential driver of future oil demand growth. India currently ranks as the third largest consumer of oil, consuming roughly 5 million barrels per day, accounting for 5% of the world’s oil consumption. The IEA projects that India will surpass China in oil demand growth in 2024, with an estimated increase of 200,000 barrels per day.
India’s rapid economic growth, positioning it to become the world’s third largest economy by 2027, has sparked optimism about its potential to drive oil consumption. Hong-Bing Chen, general manager at Chinese refiner Rongsheng Petrochemical, predicts further growth in Indian oil consumption, particularly for gasoline and gas oil.
However, not everyone shares this level of optimism. "Keep in mind that Indian demand is one-third of Chinese demand," said Vandana Hari, founder and CEO of Vanda Insights. "So is there going to be another China in terms of global oil demand growth in our lifetime or potentially thereafter? I don’t think so."
Fereidun Fesharaki, chairman of energy consultancy Facts Global Energy, emphasizes that while India’s growth trajectory is consistent and will extend well into the mid-2040s, its scale and magnitude will not match that of China’s.
Beyond China: A Complex Picture
While China’s economic slowdown is a major factor in the current oil price slump, it’s important to recognize that several other factors are also at play. The US economy is also experiencing a slowdown, and the potential for a recession looms over the oil market. Furthermore, ongoing tensions in the Middle East and the Russia-Ukraine conflict add further complexity.
Despite the bearish sentiment, it’s crucial to avoid becoming overly pessimistic about the future of oil prices. "It’s dangerous because there’s so many events out there that can ruin your day," cautioned Luckock. He advised against betting heavily on further price declines, given the potential for unforeseen events.
In conclusion, the global oil market is facing a confluence of factors that point to a downward trend in prices. China’s sluggish economy, the potential for a US recession. India’s economic growth is a potential bright spot, but it’s unlikely to fully offset the decline in Chinese demand. The global landscape is shifting, and the oil industry is navigating through uncertain waters.
