This year may see a broadly balanced oil market, reflecting slackening demand in advanced economies (impacted by monetary tightening), OPEC+ alliance cuts, plus a slowdown in non-OPEC supply, says economist Moin Siddiqi
As we begin 2024, the global economy appears lacklustre but steady with high probability of a ‘soft landing’ in the USA and Europe. The health of the world’s two largest economies (USA and China) is paramount. The weak manufacturing activity in OECD regions weighs, however, on demand for diesel and other distillates.
Key questions are the strength of oil usage in China and robustness of U.S. tight oil. Some analysts predict the U.S. shale boom has peaked, but others see a continuous growth underpinned by increased efficiency gains and production plans of shale producers. The Energy Information Administration EIA’s sees 2024 U.S. oil output growth at barely 290,000 bpd compared to some 1mn bpd last year. China’s oil demand could drop to 0.5mn bpd, as reported by a Bloomberg survey, thus reflecting a slowing economy.
General sentiment is downbeat, as indicated by oil demand forecasts from the International Energy Agency (IEA) and U.S. EIA, although OPEC remains in the bullish camp. The Asian giants (China & India) will lead in projected 2024 demand surge – with the latter expected to see an uptick in consumption to the tune of 553,000 bpd, and 329,000 bpd in the former, according to Standard Chartered.
Non-OPEC supply has expanded at a robust pace led by USA, Brazil, Canada, and Guyana – offsetting effects of OPEC+ curbs – making the latter's task of fine-tuning oil market much harder. In 2024, non-OPEC supply could rise by 1.2mn bpd, a slowdown from last year's 2.24mn bpd growth, but still covering the projected demand growth plus change, according to IEA estimates.
The ‘Call on OPEC’ in 2024, i.e., an estimate of oil production volume required of OPEC members to balance the global supply/demand for crude oil, is around 29.89mn bpd.
Oil traders are already factoring in the assumption that Saudi Arabia and Russia will extend or deepen the cuts until 2Q 2024 or beyond to keep the market balanced and prices above US$80/barrel, especially if non-OPEC supply proves resilient amid moderate demand growth. OPEC+ cuts equate to more spare capacity, hence a cap on crude futures. OPEC, including Iran, hold around 5.5mn bpd of excess capacity, according to ING Bank.
The market continues to give signs of plentiful oil supply. The EIA expects demand growth to be outpaced by rising supply growth – thus leading to higher global inventories and softer prices from late 2024 into next year. Saudi Arabia, the UAE, and Iraq are also focused on capacity building over the medium-term.
Headwinds and challenges
The hydrocarbons industry faces ongoing economic and energy transition headwinds and challenges:
*Effects of Climate Change Policies. The shift towards renewable energy as seen in agreements like COP28 (recently held in Dubai) signals a global trend towards reducing fossil fuel reliance, potentially affecting future upstream investments in oil sector.
*Technological advancements. Innovations in renewable clear energy, lower-emission fuel sources and improvements in energy efficiency, coupled with a booming electric vehicle fleet will affect long-term demand and oil pricing.
*The geopolitics of oil. Serious escalation of tensions in the critical Red Sea shipping channel around the Bab-el-Mandeb and the Gulf of Oman will disrupt global supply chains, whilst fresh instability in Libya, Iran, Iraq, and Venezuela can prompt large supply outages and risk-price premiums. The IEA in its January oil market report comments that the risk of oil supply disruption from the Middle East conflict remains elevated, particularly for oil flows via the Red Sea and Suez Canal.
*Economic volatility. Sub-par GDP growth and fluctuating currencies in key energy consuming economies, mostly Germany, France, U.K, and Japan. Cuts in U.S. Fed Funds rates (currently in the 5.25% to 5.5% range) would weaken the greenback, thus making oil-imports cheaper in non-dollar denominated currencies.
The fundamental supply/demand balance points to a soft year for oil, bar a major Middle East crisis. Prices could remain range-bound or trend downwards (in the low US$70/barrel zone) on bearish economic data from China (the world’s biggest oil importer).
Latest 2024 price projections for Brent crude (US$/barrel) are as follows:
Goldman Sachs (80-81); Citi (74); JP Morgan (83); IEA (82.7); and S&P Global (85).
