A steady growth in oil supplies from countries outside the Opec+ cartel and an uncertain economic outlook are expected to keep a lid on the price of crude this year, even as the Israel-Hamas conflict threatens to spread to the rest of the region.
Oil prices, which clocked only modest gains in the first week of 2024, dropped on Monday after Saudi Arabia cut its official selling price for oil exports in February. Brent crude slumped 4 per cent to $75.65 a barrel while West Texas Intermediate, the US equivalent, fell 4.8 per cent to $70.25.
Yet the declines leaves crude prices only a few dollars below the $80 a barrel that a consensus of analysts expect Brent, the international benchmark, to reach over the next 12 months. The prospect of oversupply, an uncertain economic outlook and a lack of clarity of how tensions in the Middle East will play out have left analysts reluctant to make aggressive forecasts in either direction.
Joe DeLaura, global energy strategist at Rabobank, said no hedge funds or traders wanted to be short oil in the mid-to-low $70s because “you could wake up one morning and there could be a tanker sunk in the Red Sea”.
Yet absent any further shocks in the Middle East, robust supply growth is expected to keep a lid on prices, which will probably “trend sideways” as a result, DeLaura said.
Last week, prices fell in two out of four sessions, after the killing of a senior Hamas leader and a bombing that killed more than 100 people in Iran.
Prices rallied briefly by as much as 3.4 per cent on Wednesday as Hassan Nasrallah, leader of Lebanese militant group Hizbollah, vowed revenge against Israel over the killing of Saleh al-Arouri, Hamas’s deputy political leader, in an explosion in Beirut.
But the gains were quickly reversed and attention instead switched to the outlook for global supplies. Traders bet that more oil from non-Opec countries would largely offset attempts by the Opec+ cartel to tighten the market.
Industry forecasters have learned to tread more warily after recent years, when events such as the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine ripped up their predictions.
“A lot of analysts have had the extremes beaten out of them,” said Mark Wilson, an analyst at Jefferies in London. “The last few years have proven that it is so hard to keep up.”
While the market has largely ruled out a big supply disruption stemming from the Israel-Gaza war, companies such as Maersk have said they will need to reroute container shipping from the Red Sea “for the foreseeable future” due to attacks by the Houthi militant group in Yemen.
Brent ended last week at $79 a barrel, only about 6 per cent higher than the six-month lows it hit last month.
Helima Croft, head of commodities research at RBC Capital Markets, said “complacent” traders had relegated the war in the Middle East “to background noise until there is a clear threat to supply”.
But for all the market’s relatively cautious nature, analysts concede that big risks remain that could shake the consensus view.
The move by Saudi Arabia over the weekend was taken by some traders as an indication that the world’s biggest exporters expected lower prices to persist as demand cools and supply from US shale producers continued to increase.
Another factor is the US presidential election campaign, and the potential impact on voters of higher prices at the pumps.
Bob Ryan, commodity and energy strategist at BCA Research, said traders were underpricing other risks such as potential cyber warfare by Russia, China and Iran, seeking to engineer higher oil prices in order to derail the chances of President Joe Biden’s re-election. Donald Trump, the Republican frontrunner, has said he would push Ukraine to negotiate.
“Unlikely as it seems, US elections can hinge on what is happening with gasoline prices at the time,” said Ryan, who expects Brent crude to rise above $100 a barrel.
Another big unknown factor is the extent to which new sources of oil will continue to influence prices.
US crude production soared last year as a boom in shale helped drive growth of about 2mn barrel a day, including both crude and natural gas liquids. The country’s exports averaged 4.2mn barrels a day in 2023, the most since the US lifted curbs on exports in the middle of the past decade, according to the US Energy Information Administration.
That helped push the price of Brent down by just over 10 per cent in 2023, the first annual fall since 2020.
That increase in US supply last year was “massive” and if market predictions of a sharp drop in growth of shale production in 2024 prove to be inaccurate, this would make it harder for Opec+ to support prices, said Bjarne Schieldrop, chief commodities analyst at SEB.
“If US production continues to increase on a very strong note in 2024 on par with 2023 then it will be much tougher for Opec+ . . . especially if global oil demand is weak at the same time,” he said.
However, Martijn Rats, chief commodities strategist at Morgan Stanley, said last week that it remains his view that oil could have a relatively quiet year, forecasting crude will trade at about $80 a barrel before easing to nearer $75 a barrel in 2025.
“The risk of disruption impacting oil prices is relatively modest at the moment. The oil market is reasonably supplied.”
