In 2023, the international situation is unpredictable, with the Federal Reserve's interest rate hike leading to high interest rate shocks, as well as the impact of geopolitical turbulence such as Russia Ukraine conflict and Palestine Israel conflict. Demand growth slows down, upstream investment weakens, debt expands, and the global economy is in turmoil. As the most important commodity, crude oil has also experienced macroeconomic pressures, risks of supply disruptions, and constraints from expectations of declining demand, resulting in skyrocketing prices and ups and downs.
According to the Commodity Market Analysis System of SunSirs, WTI crude oil fell by 8.46% and Brent crude oil fell by 7.56% in 2023. But the amplitude reached 40%. Let's review the trend of crude oil in 2023.
In the first half of 2023, international crude oil experienced a wide range of fluctuations and fell. Mainly due to the slow decline in inflation levels in Europe and America, the continued interest rate hikes by the Federal Reserve and the European Central Bank have had negative feedback on the economy, the global demand outlook is uncertain, and the probability of economic recession is increasing. Especially in March, the outbreak of the banking crisis in Europe and America further exacerbated the decline in oil prices. During this period, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) urgently managed oil price expectations, reduced production on a large scale, and played a bottoming out role in oil prices, stopping the downward trend of oil prices.
In the second half of the year, with OPEC+ continuing to reduce production and the United States entering summer, the driving season is the peak season for refined oil consumption. Supported by tight supply and strong demand in the market, oil prices continue to rise. This unilateral upward trend is mainly concentrated from July to mid to early September. After mid to late September, the market entered a downward trend, mainly due to the expected increase in interest rates by the Federal Reserve and the substantial pressure on the economy caused by the high interest rate environment, resulting in a decrease in demand expectations. At the same time, OPEC+'s efforts to deepen production cuts have not been recognized by the market, and oil prices have experienced their biggest decline in the second half of the year. Despite the outbreak of the Israeli Palestinian conflict in early October and the risk of supply interruption, oil prices rose in the short term, but the decline has not been reversed. Oil prices have fallen from above $90 to $70.
Outlook for 2024
Macro environment: Economic recession not lifted, Federal Reserve initiates interest rate hikes to hedge risks
Firstly, global economic growth will continue to slow down in 2024. The International Monetary Fund predicts that global GDP in 2024 may be lower than the 3% growth rate in 2023, and the risk of economic recession remains unresolved.
In addition, the Federal Reserve's entry into a rate cut channel in 2024 will to some extent alleviate the downward pressure on the economy. In February 2022, the Russia Ukraine conflict erupted, with energy prices soaring and global inflationary pressures skyrocketing. To combat inflation, the Federal Reserve initiated this round of interest rate hikes in March 2022. The current interest rate is in the range of 5.25-5.5%. The high interest rate environment has had a heavy impact on the economy, with weak economic data in the United States and Europe, especially the Eurozone PMI, which has been consistently below the boom bust level in the second half of the year.
From the current inflation data in the United States, it can be seen that CPI has continued to decline. The year-on-year growth rate of CPI in the United States has fallen from 6.4% in January to 3.1%, which is also very close to the target value of 2%, indicating the end of the Federal Reserve's interest rate hike cycle. At the same time, the market's expectation for the Federal Reserve to start its first interest rate cut in March 2024 is gradually increasing. The future decline of the US federal interest rate will have a positive impact on the economy, stimulate a rebound in energy demand, and provide some support for oil prices.
Supply side:
OPEC+ regulation and management of oil prices in oil producing countries will continue to be weakened
Since the outbreak of the banking crisis in Europe and America in March, which led to a significant decline in the stock and oil markets, OPEC+ production cuts in oil producing countries have been put on the agenda. On April 2nd, the OPEC+ meeting announced a reduction of 1.66 million barrels per day in production quotas. Until the latest meeting on November 30, 2023, OPEC+ announced an additional 2.2 million barrels per day reduction in production for the first quarter of 2024, including 1 million barrels per day in Saudi Arabia and 300,000 barrels per day previously continued by Russia. Other member countries have voluntarily reduced their production quotas by the remaining 900,000 barrels. Due to the lower than expected deepening of production reduction, oil prices did not rise as scheduled.
In 2024, OPEC will continue to reduce production in the first quarter, and adjust policies in a timely manner with changes in oil prices in the later period. It is also possible to further deepen production reduction. However, there are also internal disagreements within OPEC+, and various forces have many objections to the reduction of production quotas, which led to Angola, the second largest oil producing country in Africa, recently announcing its withdrawal from the OPEC+ organization on January 1, 2024. In addition, other member countries such as Nigeria have also reported plans to increase production, and these unstable factors will test the organization's ability to control oil prices in the later stage.
In 2023, US crude oil production will gradually return to pre pandemic levels. Currently operating at a high level of 13 million barrels per day. But the growth prospects for 2024 are not optimistic. This is mainly influenced by US policies, and traditional energy is subject to certain limitations in terms of strategic orientation towards new energy. In addition, due to investment constraints, the current high interest rates in the United States greatly limit upstream mining expenditures. The number of active oil and gas drilling rigs in the United States continues to decline in 2023. It is expected that in 2024, as capital expenditures continue to compress, the growth rate of crude oil production in the United States will continue to slow down and fall into a bottleneck. The US Energy Information Agency (EIA) stated in its December energy outlook report that it expects US crude oil production to be 12.93 million barrels per day in 2023, compared to the previous expectation of 12.9 million barrels per day. The expected crude oil production in the United States in 2024 is 13.11 million barrels per day, compared to the previous forecast of 13.15 million barrels per day, which has declined. Overall, the US crude oil production in 2024 was only 180 000 barrels more than in 2023.
On the demand side: The global economic growth rate is likely to slow down, and the growth rate of oil demand is decreasing
Although macro level interest rate cuts are likely to hit the United States and Europe in 2024, which will stimulate the economy, the US CPI has not yet returned to the target range, especially with slow inflation in Europe. The stimulus brought by future interest rate cuts to demand may be discounted.
The three major institutions: the International Energy Agency (IEA), the United States Energy Information Agency (EIA), and the Organization of the Petroleum Exporting Countries (OPEC) made predictions for global crude oil demand in 2024 in their December 2023 report. The forecasts from IEA and EIA were cautious, indicating a slowdown in oil demand growth in 2024. The IEA's forecast is 900,000 barrels per day, while the EIA's forecast is 1.32 million barrels per day, both significantly lower than the demand growth in 2023. OPEC predicts a growth of 2.25 million barrels per day in oil demand in 2024, showing relatively optimistic performance. However, overall, the expected growth in oil demand in 2024 is still not optimistic.
Overall
The external environment in which crude oil operates in 2024 is still quite complex, with a complex geopolitical situation and constant conflicts. This will have an unpredictable direct impact on oil prices, resulting in even more drastic fluctuations. In the long run, the supply-demand game remains dominant, and on the supply side, OPEC's production control will continue to play a role in managing oil price expectations. The demand side faces more uncertainty, and an economic slowdown is likely to create a constraint on oil prices. According to the EIA report in December, the EIA lowered its forecast for Brent crude oil prices in 2024 to $83 per barrel, a decrease of $10 per barrel compared to the November forecast. Overall, due to the large number of oil price variables in 2023, oil prices have been operating at low levels for a long time, and the base oil price is not high. It is expected that the average oil price in 2024 may still be slightly higher than in 2023, but due to demand constraints, oil prices will not increase significantly.
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