Ups and downs in oil market during 2023
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The global demand for oil has finally recovered to above pre-pandemic levels and both the Organization of the Petroleum Exporting Countries and the International Energy Agency foresee demand growth to continue by 1.1 million barrels per day and 2.5 million bpd respectively in 2024.
Both the bodies see the main growth in demand coming from emerging markets with members of the Organisation for Economic Co-operation and Development contributing little.
In 2023 oil prices were broadly constrained between $70-$90 per barrel. The low point was just below $72 a barrel in June and above $94 at the end of September.
The intra-month, intra-week, and intra-day oscillations were significant at times, which mattered to consumers. At the beginning of the year worries about a slower than predicted economic recovery in China depressed prices. Oil producers were also worried about inflation, high interest rates and what to expect in the OECD. While inflation has come down markedly, worries over rising core inflation are rife again with constrained passages through both the Suez and the Panama canals. The former suffers from the effect of hostilities at the Bab El-Mandab and the latter had to severely limit the number of ships due to historically low water levels induced by climate change and the El Nino phenomenon.
Most analysts expect interest rates to have reached their peak and come down in 2024. The question will be the trajectory and speed of interest rate reductions.
For 2024 everyone hopes for a mild abatement of growth in the US or a soft landing. China’s ailing real estate sector is also cause for concern. The current economic numbers of Germany — which faced the longest period of decline since the beginning of the century — look to be on track for a technical recession by year-end as its gross domestic product declined by 0.1 during the third quarter. The EU forecasts for 2024 and 2025 are not stellar either — with 0.8 percent and 1.2 percent respectively. Germany is not only the world’s fourth-largest economy it also matters hugely to Europe, because it is the continent’s traditional growth engine. Germany also is highly industrialized, which means that a contraction or slow growth has an impact on oil demand.
These are the demand woes. Although the real story this year was supply: US production overtook 2019 pre-pandemic levels. In September, US liquids production reached 21.6 million bpd, according to OPEC. Guyana and Brazil also surprised with higher-than-expected production as did others.
OPEC and its allies including Russia, known as OPEC+ worked hard to stabilize markets. In April the organization announced 1.6 million bpd production cuts which were eventually extended through the end of 2023. In June, Saudi Arabia announced an additional 1 million bpd of extra voluntary cuts. Saudi Arabia was later joined by Russia, which agreed to an additional voluntary cut of 300,000 bpd. Both of these cuts were extended several times and are now in force through the first quarter of 2024. In a December meeting, the ministers added an additional 780,000 voluntary cuts from OPEC+ members for the first quarter of 2024.
OPEC+ itself went through a few changes as well. In June, the baselines for African producers had been readjusted. It was necessary because quotas were out of sync with production levels of some countries namely Nigeria and Angola. Angola decided to leave OPEC in late December, while Nigeria issued a statement that it would stay in the organization. OPEC is an organic organization and members joining or leaving is nothing new. In the last decade it was Indonesia and Qatar that come to mind.
At the same time, Brazil announced that it would join OPEC+, initially with no indications of production. This move was highly significant because it gives OPEC+ production more materiality in the global context.
Looking at the range in which oil traded, OPEC’s moves were more than justified. Commodities are by their nature volatile and exposed to the vagaries of the global economy and geopolitical events. December proved that again, the oil price reached a six-month low in mid-December, just to jump 9 percent as the geopolitical tensions in the Red Sea prompted several oil companies, like BP, to redirect their tankers via the long route around the Cape of Good Hope rather than through the Suez Canal. The price has come down some since then. Brent stood at $79.07 mid afternoon CET.
On a separate note, COP28 in Dubai signified a turning point as it openly discussed transitioning away from fossil fuels. The COP presidency had invited the broadest range of stakeholders, including oil companies to the table and paid more than lip service to the quest of developing nations. Its final communique agreed to “transitioning away from fossil 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.”
Next year will be crucial both in terms of demand and supply, which are the fundamentals that define the market. It will also be interesting how the decisions taken by COP28 will affect the demand and supply of oil, its price levels, and the outlook on oil markets in the medium to long term.
• Cornelia Meyer is a Ph.D.level macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.
