Oil Prices Poised to Bounce Back in 2024
Crude oil prices are at lows not seen in months. There seem to be few factors capable of changing that. Yet commodity analysts seem to be more bullish when it comes to 2024. The key to that bullishness is demand. Even after the IEA projected faster than previously expected demand growth for next year, traders took note and analysts wrote notes. Per these notes, the five top U.S. banks expect a median Brent price of $85 for 2024. And that’s without any major supply disruption. Goldman Sachs recently cut its oil price forecast for 2024 to between $70 and $90 per barrel of Brent. Previously, the bank had expected prices between $80 and $100 per barrel. As a single number, Goldman’s analysts expected an average Brent price of $92 before the latest revision, Bloomberg reported last week, but now they may have trimmed that too. The bank cited higher U.S. oil production as the reason for the revision, as the country’s output and oil exports hit a record this year. However, forecasts for 2024 are for much slower growth next year, according to the EIA. It sees 2024 growth at barely 180,000 bpd, compared to some 1 million bpd this year. Citigroup, meanwhile, is forecasting an average 2024 oil price of $75, which is the lowest of the five forecasts and in line with Citi’s contrarian stance this year. This stance proved closest to what actually happened to oil prices this year. Citi had pegged the annual average for Brent at $80, and it is close to that. Per Citi analysts, the reason for the guarded price prediction is slower demand growth resulting from what they called “economic and energy-transition headwinds,” as quoted by Bloomberg. Citi also cited higher U.S. output as another reason for the low forecast and projected OPEC+ will stick to its deeper output cuts to put a floor under prices. The other three big Wall Street banks have set their 2024 Brent price projections at between $83 per barrel and $90. JP Morgan has the lowest price forecast after Citi, at $83 per barrel of Brent, while Bank of America is the most bullish, expecting Brent to average $90 per barrel next year. Morgan Stanley sits in the middle with a price forecast of $85 per barrel. Basically, the top five Wall Street lenders expect oil prices next year to stay within the range they’ve been over the past three months or so. Higher oil supply from non-OPEC producers is one reason. This supply is widely seen being led by the United States, but other producers such as Guyana, Brazil, and Norway are also raising production—even as their leaders signed up for a reduction in hydrocarbon use at COP28. The other part of the price equation—demand—is rather bullish. OPEC expects it to expand by 2.2 million barrels daily next year, and even the International Energy Agency, a chronic bear lately thanks to its transition focus, said in its latest Oil Market Report that oil demand will grow faster than previously expected in 2024. The revision is equal to 130,000 bpd, bringing the total demand growth rate, per the IEA, to 1.1 million bpd—half of what OPEC has forecast. The IEA attributed its revised forecast to a better economic outlook and lower oil prices, which traditionally spur greater demand for the commodity. The agency is not so impressed by non-OPEC supply growth, although it does expect non-OPEC producers to add 1.2 million bpd to global supply, covering the projected demand growth plus change. All this makes for a very neat 2024 concerning oil prices. Asia is once again expected to shoulder the bulk of demand growth, led by China and India. Disappointment may be on its way as some expectations of Chinese demand prove to have been overly optimistic, adding weight to prices. On the other hand, the increasingly frequent news of ship attacks in the Red Sea by the Yemeni Houthis and, most recently, by pirates that seized a Malta-flagged bulk carrier bound for Turkey could turn out to be bullish for prices, even though oil tankers have not yet been attacked. In the meantime, there seems to be little change of major production outages. The market has successfully shrugged off the 450,000-bpd drop in oil supply from Kurdistan as the Kurdish and Iraqi governments continue to debate the terms of resuming the exports. Libya appears to be relatively stable for now. And Venezuela and Guyana have declared their willingness to diplomatically resolve a shared territorial dispute. The global oil picture is quite bearish, indeed. In fact, those five banks’ price forecasts may need to be revised further down unless OPEC+ decides to cut even deeper, which would be a risky move. As lower prices stimulate demand, however, things may begin to change in the price department. It’s the good old oil cycle yet again.
OPEC’s 2024 Crude Oil Production Cuts, Explained
On November 30, 2023, OPEC (Organization of the Petroleum Exporting Countries) and its allies, collectively known as OPEC+, agreed to cut oil production by 1 million barrels per day (bpd) starting in January 2024. This decision was driven by several factors, but it might be helpful to consider OPEC’s motivations. In much of the world – particularly countries that are net crude oil importers – OPEC’s motivations are frequently at odds with the economic desires of those countries. OPEC seeks to maximize the value of the crude oil reserves of member countries. This is generally official government policy. Contrast that to the government policies of the U.S., which generally revolve around a desire for stable, but low prices for energy. That isn’t necessarily what U.S. oil companies seek, so that often pits the objectives of the U.S. government against those of the U.S. oil industry. In OPEC countries, the goals are aligned. In many cases, the governments of these countries generate most of their revenues from the sale of crude oil into the export market. So, OPEC seeks the highest possible oil price they can get, without putting the world into recession, or creating incentives for rival production and conservation efforts. While controlling supply to influence prices, OPEC also wants to maintain or grow its share of global oil production and export volumes. Losing too much market share undermines its ability to impact the market. Prior to the shale oil boom in the U.S., OPEC could more easily achieve these objectives. But, due to the surge of U.S. oil production, it is impossible now for OPEC to prop up prices without also providing more incentives for U.S. production. Thus, the cartel has lost some power over pricing. Nevertheless, OPEC and its allies produced about 50% of the world’s oil in 2022, and they control over 70% of the world’s proved reserves. Therefore, they do still possess significant power to influence global oil prices. But it’s often analogous to turning a big ship. It takes time for OPEC’s actions to impact the market. OPEC will announce a production cut, and if they follow through it will eventually dry up some of the excess supplies. At the same time, non-OPEC countries like the U.S. are increasing production, which helps offset OPEC’s production cuts. It’s like an arms race between OPEC and the U.S., and so far, the U.S. has been largely able to increase production enough to negate most of the impact of OPEC’s cuts. One final thought is that OPEC has wielded production cuts as a political weapon. This is one reason I expected the cartel to cut production, and why they may cut production again next year as we head toward the presidential election. I think OPEC members like Saudi Arabia and allies like Russia would prefer to see Donald Trump reelected, and they may therefore try to drive prices up ahead of the election. It will be harder for President Biden to win reelection if gasoline prices are skyrocketing ahead of the election, so this will be something to watch in 2024.
Netherlands overtakes India as Nigeria’s biggest oil buyer
The Netherlands has overtaken India as the biggest buyer of Nigerian crude oil, marking a change in the dynamics of the West African nation’s energy exports. Data from the National Bureau of Statistics showed the Netherlands bought Nigerian crude oil worth N2.5 trillion in the first nine months of 2023, while India’s imports from Africa’s top producer was valued at N1.6 trillion. Indonesia and France occupied second and third positions as they purchased Nigerian crude worth N1.72 trillion and N1.65 trillion respectively as of September 2023.
Threatening the oil market was a step too far by the Houthis
With each passing day, the global shipping crisis intensifies due to repeated attacks by Houthi rebels from Yemen on vessels in and around the Bab el-Mandeb strait. These attacks, backed by Iran, are prompting major international shipping companies to announce a halt to navigation in the Red Sea, opting instead for the longer route around Africa’s Cape of Good Hope. Just on Monday, British Petroleum, a giant in the energy sector, declared that its tankers would not sail in the Red Sea until further notice – a statement that serves as a warning signal to energy markets worldwide and ironically brings the potential solution to the crisis under closer scrutiny. For the global energy market, the significance of the Suez Canal, Bab el-Mandeb and the Red Sea is paramount. The majority of oil and natural gas exports from Gulf countries to Europe and North America pass through these vital waterways, both by sea and through pipelines. In the first half of the current year, shipments of oil through these routes constituted approximately 12% of the total globally traded oil at sea. Likewise, liquefied natural gas shipments through these pathways represented 8% of the global trade in this commodity, according to data published by the U.S. Energy Information Administration. The Suez Canal, connecting the Red Sea to the Mediterranean, is not the sole means of transporting oil from the Red Sea. The Sumed or Suez-Mediterranean pipeline, established by several Arab countries in 1974, serves as an alternative for oil transportation outside the Suez Canal. Spanning a submarine-like structure in the Gulf of Suez and extending through Egyptian territory to the Mediterranean port city of Alexandria, this pipeline can handle up to 2.5 million barrels per day. However, its capacity largely depends on the entry of tankers into the Red Sea. In other words, more oil barrels pass through the Red Sea than through Bab el-Mandeb and the Suez Canal combined. The situation is different for liquefied natural gas, as the minimal amounts of this commodity in the Red Sea.