From Russia and Ukraine still engaged in war, to Israel’s onslaught in Gaza, from big shipping companies refusing to sail through the Red Sea and from unprecedented production cuts from the Opec Plus alliance – 2023 was quite an eventful year for the international crude oil market. Despite all that, crude oil averaged 10 percent lower in 2023 from a year ago – the first annual drop since the Covid-induced bear market of 2020.
A large number of events that had all the potential to carry and sustain a bull run failed to do so in the recent past. For every punch that the bulls threw, a counter punch was ready from the bears as the see-saw went on throughout the year.
The most recent example is the Red Sea episode – where unrest and attacks on vessels forced global shipping giants to withdraw from the all-important route and take the longer and costlier route instead. The prices reacted for a few days but could not sustain longer as the US announced active patrolling of the seas to counter the attacks on vessels. Consider that the Red Sea route is still being seen as too dangerous for most big global shipping companies, although a leading one agreed to start using the route again – with an option to reassess the situation if need be.
It just took the deployment of US forces to guard the seas for oil prices to taper off, despite no change in status of vessel movement since the decision by shipping companies. What has fueled more fire to the bears is more disruption in the Opec cartel – after the latest round of agreed production cuts. Angola, the second largest African oil producer exited the cartel, unhappy over renewed production quota. This was seen coming – as the differences have been brewing since June 2023.
Angola’s exit seems to be the balancing factor for the Red Sea standstill – despite the overall impact on Opec’s production cut targets being minimal. Some observers have warned against overestimating the Angola exit impact on oil and use it as the basis for sluggish prices into 2024 – because the supply and demand dynamics for much of 1HCY24 still point out at an unbalanced crude oil market.
The US rig count has not increased at rates seen pre-Covid. The latest crude oil inventory data shows the pile is down 6 percent over the previous week – yet crude oil market saw more reason for prices to consolidate on Opec’s small troubles. Saudi Arabia and China will continue to call the shots in 2024 for supply and demand, respectively.
The US production is at an all-time high and scaling up from here, after years of substantial underinvestment seems highly unlikely. With the monetary cycles around the world gradually turning towards easing, 2024 could well be the year of a double-digit rise in global crude oil demand. With years of underinvestment in drilling, fracking, and storage – this is a perfect recipe for oil to resist any further movement south. But then, funnier things have happened in oil markets, in less than a month, ever since the 2008 crisis.