Without a major geopolitical escalation in the Middle East, oil prices are likely to remain around current levels this year, due to a comfortable spare capacity at OPEC+ producers and largely balanced supply and demand outlooks, analysts say.
Attacks by the Iran-backed Houthis on commercial shipping in the Red Sea and the US-UK strikes on military targets in Yemen in response moved Brent oil prices briefly above $80 per barrel at the end of last week, but prices quickly pulled back to around $78 a barrel in Asian trade early on Monday. The market continues to eye the developments in the Middle East and the potential of a major disruption to oil supply from the most important oil producing and exporting region.
But the oil supply and demand picture looks fairly balanced or in slight surplus this quarter, analysts say, and reckon a demand uptick in the second and third quarters would tighten the market and potentially push prices higher.
Much will depend on the OPEC+ supply policies. The alliance has announced additional production cuts for the first quarter of 2024. If the group decides to unwind those cuts, or part of them, after March, supply would be more than enough to meet growth in demand, considering that oil supply from non-OPEC+ producers – driven by the U.S., Brazil, and Canada – is also expected to continue rising. Related: Platts Survey: OPEC+ Raised Oil Output in December
OPEC+ producers now have sufficient spare capacity to potentially counter extreme market tightness and some disruptions to oil flows that could result from geopolitical risks in the Middle East.
A large disruption to oil flows in the Strait of Hormuz, where 20% of daily global oil supply transits, is unlikely to materialize, for now, analysts including Goldman Sachs say.
“For now, we believe the risk of significant disruption to oil flows from the Persian Gulf is low, but it is certainly worth keeping an eye on, given the potential impact it could have on oil supply and prices,” ING strategists Warren Patterson and Ewa Manthey wrote in a note on Friday.
As of November 2023, the OPEC+ alliance held 5.1 million barrels per day (bpd) of spare oil production capacity—or about 5% of global demand, according to data from the International Energy Agency (IEA) and the World Bank.
This spare capacity is much higher than it was at the end of 2022, and gives the market some comfort that if need be, OPEC+ could raise supply.
Last year, Brent Crude oil prices averaged $83 per barrel, compared to an average price of $101 a barrel in 2022—a difference of $19 per barrel after rounding, according to estimates by the U.S. Energy Information Administration.
In its latest monthly Short-Term Energy Outlook (STEO) from last week, the EIA expects Brent crude oil price will average $82 per barrel in 2024, about the same as in 2023, and then fall to $79 a barrel in 2025, “when we expect production growth will slightly outpace demand growth, allowing inventories to build modestly and place some downward pressure on crude oil prices.”
Recent developments in the Middle East, of course, raise the risk for supply disruptions over the forecast, which could result in higher and more volatile prices, the administration noted.
Oil demand will continue to grow in 2024 and in 2025, the EIA says, but growth would be slower than in 2023. Supply growth is also set for a slowdown compared to last year, but the market will still be fairly in balance over the short to medium term, current forecasts suggest.
Economic growth and oil demand in major economies, including the U.S. and China, will also influence the trend in oil prices as more or fewer U.S. interest rate cuts in 2024 than currently expected could tilt consumption and market sentiment upwards and downwards, respectively.
All in all, barring a major geopolitical escalation resulting in a large supply outage—which cannot be discounted—, oil prices are unlikely to reach $100 a barrel in 2024, analysts say, as American oil production and exports are rising faster and higher than expected, and market sentiment about demand is downbeat, especially for the first half of 2024.
By Tsvetana Paraskova for Oilprice.com
- Surging Tanker Rates Make U.S Oil Too Expensive for Asia
- Argentina's Oil Revolution: Vaca Muerta Shale Fuels Economic Hope
- Copper's Critical Role in Green Energy Transition