Crude oil futures lost over 10 per cent in 2023 in a volatile year of trading and reported their biggest annual drop since 2020, marked by geopolitical conflict in the Middle East and concerns about the oil output levels of major producers around the world. Organisation of Petroleum Exporting Countries (OPEC) is currently cutting output by around six million barrels per day, representing about six per cent of global supply.
Brent crude settled at $77.04 a barrel, down 11 cents or 0.14 per cent on the last trading day of 2023. US West Texas Intermediate crude settled at $71.65 a barrel, down 12 cents or 0.17 per cent. Both contracts slipped more than 10 per cent in 2023 to close out the year at their lowest year-end levels since 2020.
Analysts at S&P Global Commodity Insights say that after years of turbulence, global markets are still striving to find sustainable balance between energy supply and demand. ‘’A decelerating macroeconomic framework is adding headwinds to already slowing energy demand growth, while geopolitical events in several regions either reduce energy supply or raise the risks of supply disruptions,” according to the commodities information provider.
What did OPEC+ decide in its last meeting?
In order to counter a seasonal weakness in oil demand and downward pressure on oil prices, some OPEC+ countries plan to produce less oil—about 900,000 b/d less on a nominal basis—in the first quarter of 2024 than currently.
Saudi Arabia, which has voluntarily cut its output by 1 million b/d since July, will prolong that cut through the first quarter of 2024. Consequently, Saudi oil production will remain unchanged from current levels.
Additionally, Brazil looks set to join the alliance in January 2024. It is too early to speculate if, how, or by how much and when Brazil’s oil output may be impacted after it joins.
“Taken together, the two developments from the OPEC+ meeting preserve the unity of the group at a challenging time—with prices under pressure from a looming oil oversupply early next year—and expand its reach. Brazil is a major oil producer whose output has been rising.
Because OPEC+ members already have cut supply significantly the need for additional reductions can generate reluctance and pushback. Supply reductions by other producers for any reason whatsoever would come as a welcome relief.” – Bhushan Bahree, Executive Director, S&P Global Commodity Insights.
The reductions announced after today’s virtual ministerial meeting are voluntary rather than formal OPEC+ adjustments of quota levels—meaning market shares within OPEC+ remain officially unchanged.
The final tally of nominal cuts is not yet in—countries have been announcing them individually—nor therefore are assessments of real supply reductions.
At the top of the list is Saudi Arabia, which said it would prolong its unilateral cut of 1 mb/d through the first quarter of 2024. Because this cut has been in place since July 2023, as noted above, it will not reduce oil supply from current levels.
Russia announced it would voluntarily cut an additional 200,000 b/d of supply, bringing its total reduction to 500,000 b/d in Q1 2024. The reduction will be from an average level of exports in May and June 2023 and will consist of 300,000 b/d of crude and 200,000 b/d of refined products.
In addition, so far Iraq, the UAE, Kuwait and Algeria among OPEC members have pledged additional production cuts in 1Q 2024—they are, respectively, 223,000 b/d, 163,000 b/d, 135,000 b/d, and 51,000 b/d.
Non-OPEC members Kazakhstan and Oman have pledged to cut production in the same period by 82,000 b/d and 42,000 b/d respectively.
“The developments from today’s OPEC+ meeting highlight the imaginative ways in which the group has been evolving lately in a global oil market that is being buffeted by strong and diverse forces that range from vigorous oil production growth in the Americas to the longer-term threat to oil demand and investment posed by climate change considerations and the energy transition.” – Paul Tossetti, Executive Director, S&P Global Commodity Insights – Paul Tossetti, Executive Director, S&P Global Commodity Insights
Crude Oil outlook for 2024
For oil markets, an extended period of elevated crude prices hastened investment and activity outside of OPEC+, with production growth accelerating robustly, particularly in the United States, creating an unclear future for supply cuts within OPEC+.
Kurt Barrow, Head of Oil Markets, S&P Global Commodity Insights, said, “Strong non-OPEC+ supply growth and slowing oil demand growth have led OPEC and its allies to curtail output and support prices.”
‘’While this tactic has achieved some success, maintaining discipline among member countries may be difficult in 2024 as the loss of market share continues and non-OPEC+ volumes increase,” added Barrow. OPEC+’s ability to follow through on voluntary production cuts will be key to crude pricing over in 2024, according to the analyst.
S&P Global Commodity Insight’s supply-demand balances show a situation of oversupply and hence stock builds in the first half of 2024, with some deficit seen only by Q3 2024. In the base case, oil prices will likely hover above $80/bbl and can inch closer to $90/bbl by Q3 2024, according to the energy data firm.
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