The oil market has come to life, with prices finally meeting our expectations for 2023. As Brent rose above $90 a barrel earlier this month, its highest in a decade, barring the immediate fallout from Russia’s invasion of Ukraine in Last year, I asked us oil experts Ann-Louise Hittle and Alan Gelder explain where the market goes from here.
Why did it take so long for prices to reach $90?
We forecast Brent would be at $90 a barrel by mid-year. However, demand growth took longer to materialize due to the slowdown in the global economy and concerns about the pace of China’s recovery.
Even though we have adjusted our demand forecasts downwards, 2023 will be another year of strong recovery after the Corona crisis. We now expect global demand to increase by 2.0 million barrels per day this year, just slightly below 2022 levels and the sixth-highest annual increase this century. China will contribute half of the growth despite its perceived economic difficulties as the economy recovers from last year’s severe pandemic lockdowns. Global demand is currently at a new all-time high of more than 102 million barrels per day.
What was the trigger for prices to rise above $90?
This was more about supply than demand – particularly the September 5 announcement by Saudi Arabia and Russia that they would extend voluntary supply cuts through the end of the year. With non-OPEC production increasing faster than demand in 2023, OPEC+ production cuts have been instrumental in rebalancing the market. The extensions mean an even larger drawdown in crude oil inventories in the fourth quarter than we forecast, which will likely result in a tighter market in 2024.
Will production outside OPEC continue to rise?
Yes, but slower. We forecast 1 million b/d each in 2024 and 2025, half of this year’s growth. The main contributors are the US, Canada, Brazil and Guyana, with most coming from US NGLs. However, growth in tight U.S. oil prices is slowing sharply as operators exercise strict capital discipline in the face of rising cost inflation. After an increase of 0.8 million b/d in 2023, we expect growth of just 0.2 million b/d in the Lower 48 in 2024.
When will OPEC+ reverse its production cuts?
Fundamentals suggest that OPEC+ has room to increase production over the next two years. Non-OPEC producers are expected to meet just over half of the 3.4 million barrels per day of contestable demand we forecast for 2024 and 2025 combined. That leaves room for key OPEC producers, who will have to bear the bulk of the supply cuts, to raise production from current levels. However, much depends on demand growth and whether the global economy begins to emerge from the slowdown. Iran’s efforts to boost exports are a wild card.
Can oil prices rise?
Certainly for the next few months as both crude oil and product markets are tight. We expect Brent to average $90 per barrel in 2024, up 7% from this year. OPEC+ has every reason to continue to support the market, as strong cash flow generation is the reward for the balance of fundamentals. But not everything will go smoothly. Skillful management – and time – will be required to reverse the 2.6 million b/d production cuts and bring supply back to OPEC+’s November 2022 targets without disrupting the current balance.
What are the economic and political implications of today’s price?
First, $90/barrel isn’t that high – in real terms, it’s only 60% of the 2011 average, Brent’s all-time annual high. Second, the global economy is much less oil intensive and therefore less sensitive to crude oil price movements than it used to be. We expect the 7% average annual price increase we forecast for 2024 to have only a modest negative impact on global GDP growth. However, higher oil prices will further fuel inflation and potentially delay interest rate cuts.
However, there are winners and losers from higher prices. The producing countries are doing better, the net oil importing countries are doing worse. For the US – both as a producer and as a consumer – it works both ways.
But the economic impact of higher oil prices is felt most directly at the pump and trickles down into voters’ pockets. This opens up the possibility of a political change. How much or how little crude oil OPEC+ allows back into the market during next year’s U.S. presidential election campaign could influence voters’ intentions.
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