The current energy market landscape has led to a strong wave of short positions by investors in the oil market, driven by growing pessimism about demand (it is slowing due to weakness in China and the world in general) and optimism about supply (due to the strength of crude oil). US oil production. Oil futures have suffered an intense decline in this context, with Brent even losing $70 per barrel. According to a report published this week by Bank of America Merrill Lynch, the perception among investors of the sector has become decidedly bearish. However, this positioning could be a “death trap” for investors. A more balanced oil market than it seems (due to stronger growth in future demand) could avoid the bearish scenario that “all” investors are currently betting on.
Factors that intensify bearish sentiment
One of the main factors supporting this bearish narrative is the projection of an estimated 700,000 barrels per day (bpd) oil surplus for next year. This, coupled with OPEC+’s plan to put barrels back on the market (by the end of this year) after the deep cuts implemented in late 2022, has raised investor concerns. Adding to this are signs of weak oil demand in China, further aggravating market concerns. The rapid increase in electric vehicle (EV) sales has reduced internal combustion vehicle sales to less than 50%, leading to stagnant gasoline consumption, a significant phenomenon for the world’s largest oil importer.
In addition, the shift from diesel to liquefied natural gas (LNG) trucks is also contributing to the decline in demand for traditional fuels. The possibility of a trade war, an oil price war and a hard landing in the global economy are additional risks weighing on investor confidence. All eyes are now on this “deadly” scenario for crude oil. However, there are other options that investors don’t seem to be considering right now that could end up destroying their big bearish bet on oil, making the recent drop in crude oil a trap for all that money.
The side of the coin that no one seems to see
Despite the gloomy outlook, Bank of America Merrill Lynch maintains that the risks to prices are more balanced than they appear. The institution predicts that global energy consumption could accelerate as the next productivity revolution unfolds. The global economy is expected to grow 3.3% in 2025, which should boost energy demand. The world currently consumes about 300 million barrels of oil equivalent per day (boe/d)This means that if all the energy consumed each day in the world were converted into oil, it would take about 300 million barrels per day. Energy consumption is expected to increase by 6 to 9 million boe/d per year in the coming years.
It is important to highlight the historical relationship between global GDP growth and energy consumption, which have an 80% correlation. This suggests that as the global economy grows, energy demand will follow suit. Even as renewables gain traction, the relationship between GDP and thermal energy sources remains strong, indicating that fossil fuels will continue to play a crucial role in the global economy, at least for decades to come.
Projections for 2025
By 2025, renewables are expected to add 2 million boe/d, leaving the rest of the demand growth to sources such as oil, coal and natural gas. However, thermal coal supply growth is increasingly constrained, while China’s marine coal imports have been growing rapidly this year. At the same time, LNG supply growth has slowed and OPEC+ spare capacity may be lower than previously thought.
Therefore, Oil price of $60 per barrel in 2025 could be a floor or too low a target, compared to our central forecast of $75 per barrel by 2025. “Factors such as geopolitical risks“A rapid Fed rate cut and Chinese stimulus remain major upside risks to oil prices in 2025,” they said at the U.S. bank.
“Our economists expect an aggressive Federal Reserve rate cut cycle that will bring US rates below 3% by the end of next year. This move, if realized, could be very stimulative for demand for oil and cyclical commodities, in our view. Beyond rate cuts and geopolitics, We note that Chinese stimulus measures could come in earnest after the US elections.. Options markets have also turned sharply bearish, and options put (sale) are already much more expensive than options (call) buyers betting on a rise in crude oil. Energy is a bear trap,” BofA said.
The energy market is at an inflection point, with both bearish and bullish forces at play. While current investor sentiment is largely negative, global economic growth projections and the inevitable increase in energy demand suggest that balancing supply and demand will be critical in the years ahead. The struggle between the transition to renewables and the need to meet growing energy demand presents a major challenge for the market, which will need to adapt quickly to this new environment. While the changes are clear, oil appears to remain essential to feeding an energy-hungry world.
