DUBAI — The year 2023 proved to be another volatile period for the crude oil market, with prices fluctuating more than 30 percent within just three months, followed by an almost equivalent decline in the subsequent three months.
Spot and future prices remained below the $80/b mark at the year’s end, influenced by factors such as interest rates, inflation, tepid demand forecasts, oversupply concerns, and a strong dollar for most of the year. These factors continued to exert downward pressure on prices, partially offset by geopolitical events and the war in Gaza.
According to a recent report by Kamco Invest, the volatile trend persisted into 2024, but crude oil prices mostly trended upwards due to attacks on cargo ships in the Red Sea and subsequent retaliation from the US and UK governments. Consequently, data indicated a decrease in the number of crude oil cargoes passing through the Red Sea. The cost of shipments and insurance surged as cargoes were forced to take longer routes to avoid the Red Sea.
As tensions escalated, Brent crude swiftly rose above the $80/b mark, further supported by renewed conflict between Russia and Ukraine, including drone strikes on Russia’s Baltic coast. On the demand side, factors remained subdued, offering little support to crude oil prices and offsetting geopolitical concerns.
China’s recovery continued to face challenges as the government injected more money into key sectors, aiming for a revival or to cushion against an uncontrolled decline. News reports suggested an infusion of around $278 billion into the Chinese stock market via international units of state companies to stabilize the market.
Recent economic data from China also indicated weaker-than-expected GDP growth, despite government measures. However, a lower-than-expected decline in economic performance elsewhere, especially in OECD countries, led many forecasters to upgrade demand growth projections for 2024.
Supply-side factors remained pivotal in exerting downward pressure on crude oil prices. Despite the extension of OPEC+ production cuts, oil prices stayed relatively unchanged as increased supplies, particularly from the US, offset most concerns. The International Energy Agency (IEA) addressed this in its latest monthly report, stating that oil supply growth in the US continues to surpass expectations. Additionally, supplies from Brazil and Guyana are robust, counterbalancing efforts from OPEC.
The latest weekly data on US oil production revealed output at a record high of 13.3 million barrels per day (mb/d) for the week ending January 12, 2024. Conversely, OPEC production (including data for Angola from Bloomberg) showed a slight decline in output during December 2023, averaging 28.1 mb/d. Notably, Angola announced last month its decision to leave the OPEC group starting January 2024, with reports indicating disagreements over output quotas as the reason for the exit.
OPEC+ remained proactive in dynamically adjusting its production policies each month, depending on the crude oil market, and has clearly stated a similar strategy with the existing cuts that are in effect until the first quarter of 2024. OPEC production started high at the beginning of 2023, peaking in February 2023 at 29.2 mb/d, according to Bloomberg data.
However, the general trend in production was downward since that peak, as Saudi Arabia, Russia, and other smaller producers implemented voluntary production cuts starting from July 2023. Average OPEC crude oil production declined during 2023 after witnessing two consecutive years of growth. Output from the 13-member OPEC averaged 28.1 mb/d during the year, compared to 28.9 mb/d in 2022, registering a decline of 2.6 percent or 739 thousand barrels per day (tb/d), according to data from OPEC secondary sources.
This decline was led by a fall in output from 7 of the 13 producers in the group, while the remaining 6 producers reported higher production. The most significant decline was in output from Saudi Arabia, which dropped by 918 tb/d during 2023, followed by Iraq and the UAE with production declines of 164 tb/d and 115 tb/d, respectively.
Oil output in Saudi Arabia remained around 9.0 million barrels per day (mb/d) since the implementation of the voluntary cuts, compared to an average production of 10.3 mb/d during the first half of 2023, based on data from OPEC secondary sources.
In Iraq, oil production averaged around 4.3 mb/d during the last three quarters of the year, compared to 4.4 mb/d in Q1-2023 and approximately 4.5 mb/d during the second half of 2022. The decline in production during the latter half of 2023 was mainly due to the blockade of oil exports from the Kurdistan region, stemming from issues with Turkish authorities. Meanwhile, average production in the UAE once again fell below the 3.0 mb/d mark in 2023, reaching 2.95 mb/d, compared to 3.07 mb/d in 2022.
In early 2024, oil prices traded in a tight range, influenced by mixed data on the demand/supply front and varied perspectives on the future path of rate cuts by US and other global central banks and their impact on economic growth and oil demand. Brent crude oil futures surpassed the $80/barrel mark on January 22, 2024, for the first time in four weeks, reaching $80.1/barrel, resulting in a year-to-date 2024 gain of 3.9 percent.
The US Energy Information Administration (EIA) slightly downgraded its forecast for Brent crude oil for 2024. The agency now expects the crude grade to average at $82.49/barrel during 2023, compared to its previous forecast of $82.57/barrel. The forecast for 2024 aligns with the average Brent crude spot price during 2023.
The forecast for the crude grade for 2025 is at $79.48/barrel. The broader consensus estimate saw a downward revision this month for prices expected as of Q1-2024, now at $82.5/barrel compared to $85.0/barrel expected last month. In terms of monthly trends, Brent crude averaged at $78.0/barrel in December 2023, witnessing a monthly decline of 6.1 percent versus November 2023.
The OPEC also released its initial forecast for world oil demand and non-OPEC liquids supply for 2025 in its latest monthly report. The agency expects demand growth of 1.8 mb/d in 2025, with the bulk of the growth coming from the non-OECD region, further supported by marginal growth expected in the OECD region.
According to the report, demand in the OECD region is expected to grow by 0.1 million barrels per day (mb/d) to reach 46.13 mb/d, while non-OECD demand is projected to increase by 1.7 mb/d, reaching 1.74 mb/d in 2025. China and the Middle East region are anticipated to be the largest drivers of oil demand in 2025, with expected demand growth of 0.41 mb/d and 0.38 mb/d, respectively.
In the US, demand growth is expected to be supported by increased transportation fuel usage, higher demand for LPG (liquefied petroleum gas), and petrochemical requirements. This will be partially offset by softer demand for diesel and naphtha, in line with the trends projected for 2024. Relatively higher economic growth in 2025 compared to 2024 is also expected to bolster oil demand growth during the year.
On the supply side, non-OPEC liquids production is forecasted to grow by 1.3 mb/d in 2025, averaging 71.7 mb/d for the year. The majority of this supply growth is expected to come from the OECD region, which is projected to increase supply by 0.8 mb/d, while the non-OECD region is anticipated to boost supply by 0.4 mb/d.
The US is expected to be the largest contributor to liquids production growth in 2025, with an anticipated increase in production of 0.6 mb/d, averaging 21.96 mb/d. Crude oil production in the US is projected to reach 13.44 mb/d in 2025, according to the latest forecast from the US Energy Information Administration (EIA), compared to a forecast of 13.21 mb/d for 2024.