Oil market — beyond analysis and forecasts

The geopolitical tensions in the Middle East have reached alarming levels since the outbreak of the war on Gaza. The deteriorating security situation in the strategic Bab Al-Mandeb Strait and the severely restricted passage of mainly container ships through the Suez Canal led to many column inches devoted to what that meant for supply chains, commodities, and inflation. Ordinarily, such events have a bullish effect on the price of oil. 

Similarly the question is how come that despite repeated voluntary production cuts by the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, oil prices were down more than 10 percent in 2023 — the first annual decline since 2020 when the COVID-19 outbreak had hit markets hard? Supply is the answer!

The biggest issue was the increased production of non-OPEC+ members such as the US, Brazil, and Guyana. Indeed, the US added an additional volume exceeding 1 million barrels per day which exceeded all expectations.

So, what does 2024 have in store?

Standard Chartered expects production increase in the US to slow down to 464,000 bpd in 2024. The same research foresees a minimal net stock draw for both 2024 and 2025.

As far as demand is concerned the same research sees global demand to increase by 1.5 million bpd and 1.4 million bpd in 2024 and 2025 respectively.

This means that at this point we can be cautiously optimistic to see range-bound prices between $75 to $95 during the year. This range contains some flexibility and is far more cautious than UBS, which goes with a range between $80 and $90 per barrel for Brent.

However, the problem with predictions is that events can undermine the best analysis. China’s economy, while recovering, is still facing problems in its real estate sector. Most economists expect a soft landing for the US. This being said, the latest non-farm payrolls exceeded expectations — giving rise to inflationary concerns and the fear that the rate cuts of the US Federal Reserve may be slower than expected.

Europe’s economy is sputtering, especially as Germany, the traditional economic locomotive for the continent, struggles with substituting cheap Russian gas with more expensive alternatives as well as with the cost of energy transition.

 Those are the usual and known economic vagaries. However, there are other trends we have to consider.

For one the so-called “speculative money” in oil is very high. According to Bloomberg, algorithmic trading stands at 80 percent and net long positions of non-commercial players were at the lowest since 2011 when records began. The drivers behind these “non-commercial” players are not driven traditional supply and demand considerations of the physical market.

We also need to be careful when analyzing how economic growth translates into oil demand. As the rise of electric vehicles accelerates, the impact of economic activity on road travel is no longer a direct pass-through to crude demand.  This affects Europe, China, and other countries which aggressively expand the charging infrastructure and give incentives for consumers to switch to EVs.

When it comes to air travel, things are still easier because there are no readily available substitutes for kerosene as of yet.

We also need to have a keen eye on how the “transitioning away from fossil readily fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science,” as stipulated by COP28 communique will affect the demand picture. This may be less of an issue for this year and next, but it certainly gains increasing importance during the remainder of the decade.

Lastly, we need to keep an eagle’s eye on investment in the sector. Oil will be required to power the global economy for some time to come — admittedly possibly to a lesser degree than at the beginning of the century. Still, if there is insufficient investment in the upstream, downstream, and midstream, the required barrels may be harder to come by when they are needed.

As we have seen above, the outlook looks moderately positive. However, there are as always economic and geopolitical vagaries that can influence development and above all there are long-term trends of which we should not lose sight.

• Cornelia Meyer is a Ph.D.level macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.