On the supply side, the election of Donald Trump has reshuffled the cards and left investors in a state of uncertainty. While, just after the election, many investors were convinced that under the Trump administration, US production would rise sharply, it now appears, as we anticipated in , that investors have changed their minds in the face of technical difficulties and the reluctance of oil companies to drill indiscriminately. The disappearance of this factor, which had weighed negatively on prices, is therefore contributing to the current rebound.

Trump’s election has not only had an impact on the US oil industry, but also on other producers. The new US president’s stated intention to increase sanctions against Iran has led to fears of a substantial drop in Iranian production and exports. During Donald Trump’s first term in office, Iranian production fell by around 2m barrels per day (Mbpd) (from 3.8 Mbpd to 1.8 Mbpd), or around 2% of world production. This fall would have an impact above all on China, which buys Iranian oil at a substantial discount to world prices.

Opec+ remains committed to quotas

Another factor that has prompted a change of view among investors concerns Opec+ production expectations. The consensus was for a sharp increase in production by the cartel's members, linked to unused production capacity in excess of 5 Mbpd. In addition, a certain weariness seemed to be developing among the member countries, which were showing a desire to increase their production. However, it seems that between September and December, they changed their minds and are now sticking to a strict quota policy.

This change has also had an upward impact on prices, since it means less oil available. These changes in the analysis of fundamentals have led to a change in the behaviour of short-term investors. Indeed, since the autumn, investors had been taking ‘short’ positions, accentuating the fall in prices. In December, the change of opinion on fundamentals led to a sharp increase in ‘buy’ positions, which mechanically fuelled the rise. All these factors are likely to have a lasting influence on the price of black gold over the medium to long term.

While supply expectations have changed significantly, demand expectations have not been left behind. In the third quarter of 2024, demand expectations turned downwards, which weighed on prices.

Chinese imports holding up better than expected

The main variable influencing demand is Chinese consumption and associated imports. Although China is the second largest consumer, with around 13m barrels per day, far behind the United States, which consumes 20m barrels per day, it is the largest importer, with almost 9m barrels per day.

This appetite makes the Middle Kingdom a key player. However, since the beginning of 2024, doubts have been raised about the growth in Chinese consumption. Over the last ten years, Chinese consumption has grown by nearly 0.6m barrels per day, compared with average world production growth of 1.3m barrels per day. China is therefore absorbing half of the world’s growth.

Recently, however, it has become apparent that this growth in consumption is tending to slow due to less dynamic economic activity and lower petrol consumption as a result of the high penetration rate of electric cars, with one out of every two cars sold in China being an electric vehicle. However, the growth in sales of electric vehicles has stalled, with consumers preferring hybrids. As a result, doubts have arisen about the decline in petrol consumption, which accounts for 60% of petroleum product consumption.

These doubts, combined with announcements of support for the Chinese economy, prompted investors to reconsider their views on future demand. They have become more optimistic about demand growth thanks to China, but also thanks to India. India imports around 5 Mbpd and is forecasting import growth of 2 to 3% for 2024. This pace should continue in 2025, making India the most dynamic country in terms of oil import growth. This new momentum in India should stimulate demand more than expected.

Reconfiguration in progress

In conclusion, both long-term and short-term investors have recently been surprised by the reconfiguration of black gold fundamentals on both the supply and demand sides. Pessimism about Chinese demand has given way to more optimism, linked to a more dynamic economy than expected and slower-than-expected growth in sales of electric vehicles. What’s more, India is providing the market with a new engine for growth.

On the supply side, the election of Donald Trump has reshuffled the cards, but his desire to produce more in the United States seems to be coming up against oil companies that are reluctant to increase production. Added to this is the risk of tougher sanctions against Iran, leading to a substantial reduction in its production. All this is leading investors to anticipate slower growth in US production. Similarly, Opec+ seems to be sticking to its strategy of not increasing production excessively, thereby supporting prices. As a result, supply is unlikely to be as buoyant as expected in September.

The combination of all these factors explains the recent rise in crude oil prices. However, it is important to bear in mind the fragility of these expectations, which can quickly turn around and cause volatility on the markets.

Manuel Maleki is a PhD economist with the Edmond de Rothschild Group.

This article was originally published in .