Several international events have converged at the turn of the month that could see oil markets in for a bumpy ride in early November, including ongoing tensions in the Middle East, a continued weak demand outlook in China, uncertainty about an OPEC+ planned production hike and an extremely tight presidential contest in the US.
This week’s note focuses on crude oil production in North America – including western Canada, where the effects of the Trans Mountain pipeline expansion are building momentum.
Crude stocks dropped by 0.5 million barrels, while gasoline and distillates stocks also declined.
Projected growth in crude stocks was expected to be in the range of 1.6 million to 2.3 million barrels across surveys.
However, the week began with a 28 October selloff, as Israel showed restraint in retaliatory attacks on Iran over the weekend, targeting only military sites and air defense systems rather than Iranian oil production facilities, nuclear sites or civilians.
The relatively restrained response — and Iran’s lack of immediate retaliation — brought a bearish sentiment to crude oil prices in a market already plagued by concerns of oversupply and weaker Chinese demand. China’s economic stimulus efforts so far have struggled to produce the expected results quickly enough, and demand projections were further complicated by the European Union’s announcement of a tariff hike lasting five years on electric vehicles manufactured in China.
Next week’s US elections, and the potential of even more tariffs if former President Donald Trump returns to the White House, will continue to put backpressure on China’s stimulus efforts.
China's manufacturing PMI rose to 50.1 in October, marking its first growth in six months, while non-manufacturing PMI also improved, signaling early effects of recent stimulus efforts.
Yet, challenges like weak producer prices and sluggish external demand persist, as policymakers aim to sustain this momentum toward a 5% growth target.
The 5 November US election outcome certainly has some potential to affect the supply fundamentals related to the North American crude production outlook.
An increase in US production and Canadian crude reaching Asian markets are factors that OPEC+ will be watching carefully.
Rystad Energy has been calling for the extension of cuts by OPEC+ for some time and that the group’s main goal should be to sustain backwardation in the crude market, rather than a certain price level.
US crude projection upgraded for the fourth quarter
Rystad Energy’s latest outlook for US oil production has been upgraded from our September update by about 150,000 barrels per day (bpd) for the fourth quarter of this year.
This upside is broad-based across regions, reflecting more efficient completions activity rather than improvements in well performance or rising activity levels.
As a result, the changes to our forecast are more modest for 2025-26, with end-2025 oil total up by only 50,000 bpd. Even at the $70-$80 per barrel range that Lower 48 operators typically have planned around, Rystad Energy expects the drilling declines seen in 2024 to continue, due to the lagging impact of consolidation.
At sustained sub-$70 per barrel prices, this trend would only accelerate. Rystad Energy projects total US crude production to touch 13.5 million bpd by December 2024, 14.1 million bpd by December 2025 and 14.4 million bpd at the end of 2026. Production is likely to plateau thereafter.
While production is slowly increasing, the WTI Midland crude oil grade from the US Permian Basin is getting lighter, with the API rising from around 41 in 2016 to more than 43 in 2025.
A lighter API makes the grade less attractive for many refiners in Europe, China, and the US, which are configured to use heavier grades.
The lighter quality also has knock-on effects on markets for natural gas liquids (NGL) and blending components, with potential impact on US and European gasoline markets ahead of the 2025 driving season.
Rystad Energy expects the trend to have little near-term impact on US oil production.
Canada crude is reaching eastern markets
Canada crude production has grown from a level of 4.1 million bpd in 2020 to an estimated 4.7 million bpd this year and is projected to reach 5.0 million bpd by 2025.
The Trans Mountain pipeline expansion is proving to be a strategic hedge against dependence on a US pipeline route for exports.
Asian buyers have driven a significant growth in exports from Canada’s western coast in the nearly six months since the Trans Mountain pipeline expansion project began operation.
Commissioned in the second quarter of this year, the expansion project added 590,000 bpd of export capacity for crude oil from the Western Canadian Sedimentary Basin, bringing Trans Mountain’s capacity to 890,000 bpd.
Prior to the pipeline expansion, most Western Canadian crude oil production was landlocked and had to be exported first to the US Gulf Coast to gain access other export markets.
This heavy reliance on the US market and lack of optionality left Canadian producers vulnerable to market saturation and reduced revenues.
Since the pipeline expansion began operations almost six months ago, Canadian crude oil exports via Trans Mountain have jumped significantly to an average 656,000 bpd in 3Q24, an increase of around 53% from 2Q24.
All the growth is tied to waterborne exports, as pipeline infrastructure to access the Puget Sound refineries remains unchanged.
While US West Coast refineries have increased waterborne imports of crude oil from Canada, Asian refineries especially have capitalized on access to this new source of supply.
Two-thirds of the crude oil transported through Trans Mountain is now being sent to China, India, South Korea, and Japan.
Of all events to keep an eye on, the US election looms largest, as North American crude producers explore export markets in the East, OPEC+ manages production cuts and hopes temper for a speedy economic revival in China.
