- Weaker economic climate and higher production have knocked back oil prices
- A mix of factors – Opec being just one – will determine whether oil rebounds next year
Energy has been a serious driver of inflation in the past two years, but a weaker economic climate and higher production have knocked back oil prices more recently. This has been a boon for those filling their cars up, helping take some of the heat out of the previous growth, but Opec leader Saudi Arabia is intent on forcing prices back up.
Still, it is a mix of factors – Opec being just one – that will determine whether oil rebounds or stays at current levels next year.
The supply
Oil and gas producers see higher prices as a good thing. But the world is not so simple, especially given the varied nature of those deciding how much oil will come out of the ground next year, ranging from companies in the US to states such as Saudi Arabia and Russia.
The knock-on effects of these collective decisions will be felt by everyone, however, given the importance of oil and gas prices to headline inflation. A ramp-up in the Middle East conflict could also send oil prices soaring.
Last year there was far more alignment between the different players in the energy sector, as US shale companies held back investment and Opec repeatedly cut supplies to offset weaker demand from China. This year, however, cartel cuts were not enough to make up for much greater output from the US onshore industry and a disappointing Chinese pandemic recovery.
The oil price peaked around $95 (£75) a barrel this year, on the back of continued Opec cuts and then the outbreak of conflict in the Middle East. But the last quarter of 2023 saw it fall back to under $80 a barrel due to resilient supply levels and weaker demand than anticipated.
While Opec is cutting, US producers increased output by 1mn barrels of oil per day (bopd) this year. Investment bank Jefferies sees another 340,000 bopd increase for 2024, driven by shale oil output in the Permian basin and new Gulf of Mexico barrels. Even though the rig count hasn’t rebounded fully post-Covid, higher productivity has boosted output and total US oil production is now 13mn bopd – double what it was a decade ago.
Meanwhile, Opec’s production cuts have been undermined by member states not dropping output enough. “Opec+'s supply restraint was successful at underpinning prices during the Covid-19 period. This time around, though, spare capacity is ballooning even as oil demand has rebounded comfortably above pre-pandemic levels,” said Neil Churchill at HSBC.
He suggests that this is down to Iraq and Nigeria, known for not following directives, although Russia (the plus in 'Opec+'), Iran and Venezuela made the largest impact in terms of net increases. The latter two countries were not included in the production cut agreement.
Saudi energy minister Prince Abdulaziz bin Salman has railed against “speculators” pushing down the oil price all year, and last month said the most recent trend downward was a “ploy” and “abuse of numbers” as Middle East exports were confused with production levels. Churchill said the plunge had been “amplified by trading algorithms”, however, suggesting there is some truth to the comments.
Bin Salman said the next cut would make an impact. “I honestly believe that 2.2mn [cut] will happen,” he added in an interview with Bloomberg last week, referring to scepticism that Opec countries will stick to cuts agreed at the end of November.
An unruly group of Opec member states is plenty to handle, but another issue is the Saudis losing market share. The state now has cut output by 1.5mn bopd since April, and its total production is down to 9mn bopd, the lowest in 12 years excluding crisis points such as the depths of the pandemic and a terrorist attack in 2019, as per HSBC data. This could influence Opec moves in a different way in the next two or three years as the Saudis look to build back market share.
Demand
Demand is harder to quantify than supply on a monthly or annual level, but a better global economy generally means a higher need for oil. Goldman Sachs sees real gross domestic product (GDP) growth of 2.6 per cent in 2024 and inflation of 2-2.5 per cent.
The question mark for the coming months is China, which has continued to report weak economic numbers.
“Persistent deflation in both CPI and PPI figures in November underscored the concerns among consumers and emphasised the need for further measures to boost consumer confidence, stabilise the property market, and revive demand in the economy,” said Axa IM China economist Yingrui Wang.
Headline deflation was 0.5 per cent in November in China. This was partly due to lower energy prices, showing the symbiotic relationship of some of these macroeconomic drivers. More stimulus is expected later in December, Wang added.
As above with China, there is the chicken-and-egg situation in the Middle East. “A potential escalation of the war in the Middle East that interrupts trade through the Strait of Hormuz could lead to significant increases in energy prices that would likely lower global growth,” Goldman Sachs economists say. The strait is a key route for oil tankers.
Analyst consensus for Brent crude in 2024 is an average price of $88 a barrel, equivalent to only a minor uptick from this year. Churchill at HSBC forecasts $82.5 a barrel for next year and $76.5 for 2025, off the back of Opec unwinding some production cuts.
