Global tensions have oil traders on edge, and short-lived upward price spikes are possible, but supply and demand will rule the day. Crude oil prices will likely head lower in 2024.
Spot, or front month WTI crude oil futures prices on the Chicago Mercantile Exchange (CME) are are up around $6 per barrel so far this year, a rise of roughly 8% or so in just 4 weeks’ time. But if it were not for Mideast tensions, oil prices would likely be a good bit lower than where they are today.
OPEC+, the influential global consortium of oil producers, has maintained production cuts since the middle of 2023, primarily because it fears a global supply/demand imbalance due to increased production from non-OPEC aligned countries. Oil production increases have been higher than expected by almost everyone, and when balanced against global oil demand that is growing at a slower rate than many anticipated, the seeds of an oversupply situation have been planted.
OPEC+ responded accordingly in 2023 with production cuts designed to maintain supply demand balance and stability in oil markets. But high prices have a way of incentivising commodity production, most especially in oil markets. OPEC+ members do not control enough global production to overcome one of the golden rules of commodities trading : “High prices are the cure for high prices.” The harsh reality for OPEC, and all oil producers for that matter, is that if it were not for the fears of major military conflict in the Middle East that could potentially disrupt the supply of oil, prices would head lower, perhaps much lower.
Enormous pressures face the OPEC+ consortium right now, not the least of which are outright cracks in their alliance. Angola is the latest member to part ways with OPEC, which it did last month. It’s not the first member to leave nor will it be the last.
OPEC has a rich history of losing members, particularly in times of oversupply when member countries face the choice of reducing revenues by reducing oil sales in accordance with OPEC goals or leaving OPEC and producing all they can in an attempt to maintain oil revenues. Of course, selling higher volumes at lower prices feeds the cycle of oversupply, which fuels a downtrend in prices, which pressures more OPEC members into leaving the alliance, or at into least not conforming to OPEC production restrictions.
Global oil supplies are more than adequate right now, and idle excess global production capacity is actually quite high as well. In fact, the U.S. Energy Information Administration, in its January 2024 report, stated succinctly that “…global oil inventories will build over the final three quarters of 2024 as slowing demand growth once again is outpaced by rising supply growth.” This is a clear recipe for lower prices; it is only the specter of a disruptive war in the Middle East that is keeping oil prices in their current range of around $70 to $90 per barrel.
To be sure, if tensions escalate, (which seems to be the case as of this writing), and if military conflict does actually disrupt the flow of some Middle Eastern origin oil, there can, and will, be higher crude oil prices ahead. But those will be short lived price spikes from which only the most nimble of traders will benefit.
As oil prices remain at currently elevated levels, and if they rise even higher from here, every oil producer on the planet will produce more oil, including OPEC+ and all of its members. Oil prices will head lower, and WTI prices will likely find their way towards $50 in 2024.
