OIL prices have slumped nearly 20 per cent from their September highs. A new year has begun. How would the crude oil markets behave in 2024? That’s a trillion-dollar question.

Forecasting future oil market trends is never easy. It could be professionally hazardous, for the number of variables impacting the markets are numerous, and not all can be accounted for in any analysis. Yet, people need to indulge. So am I.

Analysts are divided on the 2024 price outlook. Yet, there seems to be one consensus: economic and energy-transition headwinds and the ongoing US output surge will dictate the oil markets in 2024. Global crude demand patterns and the state of the global economy during the year would also have a considerable influence on market dynamics. Geopolitical developments also cannot be ignored. They, too, would influence crude market patterns in the foreseeable future.

The Organisation of Petroleum Exporting Countries (Opec) and its allies in the expanded Opec+ face daunting challenges. Markets are getting flooded with rising output from competing, non-Opec producers. With record-breaking US oil production and rapidly growing output from other non-OPEC+ producers, including Brazil, Guyana, Canada, and Norway, OPEC today is no longer the sole arbiter of the supply side of the global crude equation.

An increase in US oil output, fissures within Opec+ and possible dynamics of the Israel-Palestinian war will dictate the oil prices this year

The United States today is the largest crude-producing nation in the history of mankind. A US Energy Information Administration (EIA) report says that the US crude oil output reached an all-time high of 12.9 million barrels per day (bpd) on average in 2023. And in 2024, it is expected to hit another record average of 13.1m bpd. This is huge. In contrast, the Saudi output today is roughly around 9m bpd.

This level of US output is challenging Opec’s domination of the oil markets. It is signalling that perhaps Opec is at its limit in terms of how much it’s willing to cut. Because this also means losing market share. “If the US does continue to keep on producing more and more, the ability for Opec to show more cuts may not be enough to balance the market,” Jeremy McCrea, managing director of energy research firm Raymond James, said.

The oil markets remain bearish, with analysts predicting Brent prices to be somewhere between $75 to $92 per barrel

The ongoing Israel-Palestine war has not caused much disruption to oil markets. Oil prices have been mostly falling during the conflict. But that might change, some say. Yemen’s Houthi faction has attacked oil tankers in the Red Sea in solidarity with Palestinians. The attacks have caused shipping companies to reroute tankers and containerships on much longer journeys, forcing shipping rates higher and sending oil prices about 8pc higher.

The US has attempted to police the shipping routes near the Suez Canal but has not been able to convince other countries to join in. Should the attacks intensify and force more tankers to avoid the canal for a longer period, it could cause a more dramatic reaction in the oil market.

The war could escalate in other ways that could impact oil prices. If Iran gets more directly involved, for instance, it could spark a much more complicated conflict that would almost certainly cause prices to rise by a double-digit percentage, media reports assert.

Discontentment with the output cut policy in Opec is rising. It is creating fissures within the group. African oil producer Angola has already announced it would leave Opec to pursue its strategy. Some others could follow suit. This could eventually lead to a free-for-all scenario, and markets could collapse.

Although global recessionary fears have somewhat diminished and interest rates are expected to get lower in the new year, markets are fretting over a likely drop in demand for crude, especially in China.

Chinese economic recovery is still slow and its appetite for electric vehicles is growing so fast that Bloomberg recently reported that Chinese crude demand could touch its peak this year. That is not a good omen for oil markets. In the meantime, EIA is forecasting that demand growth will slow down in 2024. EIA now sees 2024 demand growth at barely 180,000 bpd, compared to some 1m bpd in 2023.

However, Opec and the International Energy Agency (IEA) demand growth forecasts are considerably on the upper side. Opec expects the demand growth in 2024 to be 2.2m bpd, while the IEA, in its latest Oil Market Report, said that oil demand during the year will grow by 1.1m bpd — half of the Opec projection. This IEA report, though, has been revised upwards by 130,000 bpd from its earlier projections of global demand growth.

The IEA attributed its revised forecast to a better economic outlook and lower oil prices, which traditionally spur greater demand for the commodity. The IEA also doesn’t seem very impressed by non-Opec supply growth, although it does expect non-Opec producers to add 1.2m bpd to global supply, covering the projected demand growth plus change.

Analysts are striving hard to paint the 2024 oil market picture, taking all these into account.

Goldman Sachs recently cut its Brent price forecast for 2024 to between $70 and $90 per barrel from $80 and $100 per barrel stipulated earlier. As a single number, Goldman’s analysts expected an average Brent price of $92 before the latest revision. The bank cited higher US oil production as the reason for the revision, as the country’s output and oil exports hit a record this year.

Citigroup, meanwhile, is forecasting an average 2024 price of $75 for Brent crude. This is the lowest estimate put by any major global bank. The other three big Wall Street banks have set their 2024 Brent price projections at between $83 per barrel to $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 in 2024. Morgan Stanley sits in the middle with a price forecast of $85 per barrel.

The global oil picture is still bearish. Irina Slav of Oilprice.com feels that the price forecasts of the above-mentioned five major global banks may need to be revised further down unless Opec+ decides to cut even deeper. That would be a risky move.

Unless there is a major global geopolitical upheaval, oil markets will continue to present a gloomy picture in the months ahead. From a crude market price perspective, the new year may not be much different from the previous year, one could say with some sense of conviction.

Published in Dawn, The Business and Finance Weekly, January 1st, 2024