JPMorgan Chase: Global oil demand is strong, but crude oil demand is weak

The decision of OPEC+ on Sunday caused a heavy blow to international crude oil prices, with Brent crude falling below $80 and WTI crude falling below $73 for the first time since February 6th, but global oil demand may not be as weak as it seems.

In its report last week, JPMorgan Chase pointed out that global oil demand is strong, but the crude oil market remains sluggish. The overall market fundamentals are expected to improve this summer, with increased demand for gasoline and aviation fuel. Brent crude is expected to rise by $10 before September.

Crude oil: refers to unprocessed oil directly extracted from underground; Petroleum: oil that has been extracted and processed through refining, including gasoline, diesel, aviation kerosene, fuel oil, and lubricants.

Specifically, JPMorgan Chase's report indicates that the rise in oil demand is more pronounced, transitioning from the seasonally low months of April and May to the peak summer travel season:

In the first quarter of 2024, oil demand increased by 1.33 million barrels per day, with crude oil-derived products such as gasoline and diesel accounting for only 40% of the growth, while demand for light oils such as natural gas and other petrochemical products showed more significant growth.

However, despite the overall increase in oil demand, the crude oil market is still sluggish in 2024, mainly due to factors such as warm winter weather leading to a decrease in heating oil demand, persistent expectations of high interest rates by the Federal Reserve, and delayed refinery maintenance.

Rising Oil Demand, Yet Crude Oil Market Remains Sluggish

JPMorgan Chase points out that the current crude oil market remains robust:

Due to the mild winter weather, demand for heating fuel oil in the first quarter was suppressed. Federal Reserve officials hinted that interest rates may remain high for a longer period, posing a challenge to demand outlook for the second half of the year.

Operating rates at Chinese refineries declined in April, and European refineries resumed slowly after spring maintenance, further depressing crude oil demand. Global visible oil inventories increased by 60 million barrels in April, weakening refining margins and differentials.

These factors have led Brent crude to fall by $10 since early April, with the first "bearish contango" since January indicating oversupply.

From a long-term perspective, JPMorgan Chase believes that the structure of oil demand is changing:

Since early 2023, it is expected that in the coming years, oil demand will shift from road fuels to petrochemical products, forcing refiners to shift from relying on crude oil to using more natural gas liquids (NGLs) as feedstock.

The demand for crude oil used to produce burning fuels such as gasoline, diesel, aviation kerosene, and fuel oil is expected to peak at the end of this decade or later, while the consumption of petrochemical products such as ethane, butane, and propane NGLs is expected to rise.

Bullish on the Crude Oil Market, Brent Oil to Rise by $10 this Summer

JPMorgan Chase remains optimistic about oil prices in 2024, expecting demand growth and improved market fundamentals to drive Brent oil up by $10 before September. Here are four main factors supporting this view:

Demand Factors: Oil demand is transitioning from the off-season in April and May to the summer peak for tourism. Demand growth over the next four months is expected to shift from petrochemical products to petroleum products such as gasoline and aviation fuel. The Memorial Day weekend may signal a busy summer travel season, with nearly 82% of American adults planning at least one road trip. Major U.S. airlines expect record-high summer travel, with international market passenger traffic projected to grow by 6.3%. Additionally, the heatwave in India may indicate an increase in energy demand, as summer weather forecasts show no signs of relief;

Refinery Factors: To meet the seasonal demand growth for key petroleum products, refinery throughput is expected to increase by nearly 4 million barrels per day from the end of April to the end of August. Global refinery daily production is projected to reach 85.6 million barrels, surpassing pre-pandemic peaks;

Crude Oil Inventory Factors: In the first three weeks of May, visible crude oil inventories have turned to decline, decreasing by 34 million barrels, mainly due to destocking in China. Market fundamentals are expected to improve;

OPEC Factors: OPEC has decided to extend production cuts until the second half of 2024