The Middle East is shrouded in dark clouds, will oil prices rise?

Barclays Bank has further raised its Brent crude oil target price in its latest report due to escalating geopolitical tensions and further tightening supply. The target price for Brent oil in 2024 has been raised to $90 per barrel, with a target price of $94 per barrel in 2025.

However, analysts emphasize that despite a series of recent geopolitical crises, such as Iran's declaration of retaliatory attacks against Israel and Ukraine's continued attacks on Russian refinery infrastructure, the substantial impact of these events is limited. It is expected that the increase in oil prices will also be limited, and geopolitical risk premiums may even fall in the short term. The upward revision of the Brent oil target price is mainly based on factors such as improved OPEC+ production discipline, slowing growth in US shale oil production, and global manufacturing recovery.

In addition, the bank is optimistic about the long-term demand outlook for oil. Analysts do not believe that oil demand will peak by the end of this decade, and they believe that the negative impact of electrification transformation will be offset by growth in oil demand in other areas.

As of the time of writing, Brent oil is trading at $89.78 per barrel.

Geopolitical crises are not expected to lead to supply disruptions. According to Xinhua News Agency, on April 1st, the Iranian consulate in Damascus was hit by an Israeli airstrike, resulting in the death of a senior Islamic Revolutionary Guard Corps officer. Iran subsequently issued stern retaliatory threats, even claiming the ability to block the Strait of Hormuz.

Furthermore, since the beginning of this year, Ukraine has frequently used drones to launch attacks deep into Russian territory, causing severe damage to multiple refineries.

However, Barclays analysis suggests that despite Iran's retaliatory threats and Ukraine's attacks intensifying geopolitical tensions, the market does not seem overly concerned about significant supply disruptions at the moment. Geopolitical tensions have not had a clear spillover effect on oil prices:

The Brent futures curve scarcity premium, a measure of geopolitical risk premium, has dropped by about 3% since the start of the Israel-Palestine conflict in October last year, despite relatively tight inventory conditions. This indicates that market participants may not be overly worried about potential major supply disruptions.

From the perspective of oil exports from the two major oil-producing countries, the impact of geopolitical crises is limited. Iran has not directly intervened in the conflict with Israel so far, and although Russia's refined oil exports have been affected by drone attacks, crude oil exports are still increasing Russian refined oil exports have decreased in the past few weeks (by about 200,000 barrels per day), which may be due to interruptions caused by Ukrainian drone attacks on refineries, but crude oil exports have increased (by about 150,000 barrels per day).

On the other hand, Iran's total oil exports have been maintained at around 2 million barrels per day since the beginning of this year.

Analysts believe that if there are no major supply disruptions in the crude oil market in the future, it may lead to a short-term decrease of $2-3 per barrel in geopolitical risk premiums.

US oil production growth is expected to significantly slow down and global oil demand is recovering

According to Barclays' calculations, due to increased production capacity constraints by OPEC+ and relatively weak non-OPEC+ supplies, there will be a deficit of 400,000 barrels per day in global oil supply for the full year of 2024.

Barclays believes that based on production trends in major shale basins and drilling activities, as a key pillar of non-OPEC+ production capacity, US shale oil production growth is expected to significantly slow down in the coming years, possibly dropping from 1 million barrels per day in the fourth quarter of last year to 400,000 barrels per day in 2024, with Brazil's production capacity also slowing down:

EIA and ANP data not only show that oil production in the US and Brazil (major sources of non-OPEC+ supply growth) is slightly below the level of the fourth quarter of 2023, but also that most US producers' production guidance for 2024 (and fourth quarter 2023 earnings) indicates a slowdown, which is largely in line with our view.

As we have pointed out many times, we believe that US production growth may slow down due to structural factors such as declining unit productivity and shrinking reserves base relative to production.

Last year, activity by private oil companies in the Permian Basin stabilized. While technological advancements may help improve capital efficiency, unless there are significant breakthroughs to significantly increase recovery rates, we believe US shale oil growth could sharply decelerate in the coming years.

Meanwhile, OPEC+ spare capacity is currently increasing, standing at approximately 4.6 million barrels per day. Analysts point out that this reflects OPEC+ member countries adhering more consistently to production cut agreements:

OPEC+ not only extended the additional voluntary adjustments announced at the end of last year until the end of June, but also key member countries such as the UAE have improved their compliance. According to our estimates, the compliance rate of the UAE was 85% and 86% in January and February 2024, respectively, compared to an average level of 80% last year.

From the demand side, macro data shows that oil demand is experiencing a tailwind, with global manufacturing PMI being below the boom-bust line for 18 consecutive months, and has now been above 50 for two consecutive months. Analysts also pointed out:

The monthly data from the EIA shows strong demand in the United States. Our estimates for China indicate that with stable industrial activity, the oil demand is recovering from a relatively weak situation in the fourth quarter of 23.

Oil demand will not peak by the end of this decade

Regarding the widely circulated claim by the IEA that "oil demand will peak by the end of this decade," analysts expressed opposition:

We believe that despite the increasing threat posed by more and more electric vehicles, at least by the end of this decade, oil demand will not peak. This is because the decline in oil demand for cars is likely to be offset by the continued growth in other final uses.

Analysts emphasized that the biggest threat to oil demand comes from the electrification of transportation, but this is unlikely to push the overall oil demand curve downward.

Looking ahead, the U.S. Environmental Protection Agency (EPA) forecasts that by 2032, electric vehicles will account for 56% of new vehicle sales in the United States, up from around 8% in the fourth quarter of 2023; the share of plug-in hybrid electric vehicles will increase from around 2% to 13%. The agency estimates that by 2032, U.S. gasoline demand will decrease by 9% from the 2020 baseline.

According to analysts' calculations, since passenger cars account for about 25% of global oil demand, if the global shift to electric vehicles progresses similarly, it means that total demand by 2032 will be 2% lower than last year.

However, judging from the mid-term level of industrial activity cycles, overall oil demand outside of car oil is growing at a rate of about 800,000 barrels per day each year. This means that despite the rapid increase in vehicle electrification, oil demand in 2032 may still be 5 million barrels per day higher than last year's level