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While demand has been strong, even stronger supply has weighed on oil this year. MoneyTalk’s Greg Bonnell discusses whether that trend will continue with Andriy Yastreb, Vice President, Portfolio Research with TD Asset Management.
Transcript
Greg Bonnell: Oil prices have been volatile this year. It’s making it a bumpy ride for energy investors. So will that trend continue into 2024? Joining us now to converse, Andriy Yastreb, Vice President for Portfolio Research at TD Asset Management. Andre, great to have you back on the show.
Andriy Yastreb: Thank you for having me.
Greg Bonnell: So this has been a pretty wild ride for oil, a pretty wild ride for energy investors. What exactly happened this year? I mean, we had a certain idea about demand heading into the year, and I believe that actually held up.
Andriy Yastreb: Yes. So if you look at what happened in 2023, demand was strong. And that was expected to be strong. If you go through the details, about a year ago, expectations for demand growth this year was about 2 million barrels per day. And as we sit here — we haven’t finished the year yet, so we’re still looking just at estimates, but we should be around that 2 million barrels plus minus 10%.
So demand grew very strongly, as expected. Some of the drivers to the upside were China had to reopen. A year ago, they were just starting that process. And also a year ago, air travel was below pre-COVID levels. Where we sit right now, from at least oil demand perspective, China has reopened. Chinese consumers are moving around. They’re traveling. Congestion levels are high, and air travel recovered to above pre-COVID levels.
Greg Bonnell: So we think about the demand we were expecting, and we got it. So what happened to the price of oil? What were the factors driving it lower?
Andriy Yastreb: Well, that’s an interesting question, right? Because if you look at what happened in 2023, the big surprise was that OPEC had to cut production repeatedly. And despite all those cuts, oil is still down year to date. So if you look at the drivers of that, basically, if demand was strong, and that helped, if OPEC was collaborating trying to maintain prices, but it didn’t work, the only factor left is supply.
And within supply, there are three kinds of broad buckets of what happened. First of all, US production was stronger than expected. If you look at DOE data for production, year-on-year, we’re just over a million barrels as of now. And a year ago, expectations were roughly half a million, maybe a bit more than half a million, of US production growth. So it was stronger than expected. Some of that might be kind of minutia of how do we count the barrels and some of the adjustments to their statistics. But even without that, the bottom line is that there is a lot of crude and a lot of liquids coming from US producers. So that was the first factor.
The other factor was that if you look at producers that were growing production, admire Canada, Brazil, Guyana, plus some of the OPEC members that struggled with production, especially in Africa — Libya, Nigeria, and Angola — all of their production either grew a bit faster than expected or surprised to the upside after years of disappointment. So that was the other culprit of growth. And OPEC couldn’t kind of offset most of that situation.
Greg Bonnell: So we got three factors there, despite the fact that the demand held in and we had some supply factors on that side. So that was the year that’s almost behind us. We’re getting pretty close to the end of December and into 2024. How is the setup, then, for 2024 when it comes to the oil market?
Andriy Yastreb: So that’s an interesting question. If you look at demand side first, I think that one is a bit easier to call. We don’t have those one-time factors anymore, right? So we don’t have a China re-opening that has played out, largely. We don’t have air travel recovering, that also has played out.
So next year, demand growth will be driven pretty much by GDP growth. And after all those interest rate hikes across the globe, the expectation is that economic growth will slow down next year. So if we put all of that together, expectations are roughly a million barrels growth for next year.
And if you look at that from perspective over the long term — typically, over long periods of time, demand grows by about 1.5 million barrels per day. So we are kind of expected to be at the bottom of that range for next year. If you look at the supply growth, it’s a little bit more interesting, because we will still have production growth from places admire Brazil, Guyana, and Canada. Those are kind of, outside of OPEC, places where we see long-term sustained growth.
If you look at the US, that’s where it becomes interesting because market expects, again, about half a million barrels of production growth next year. The reason I say that it’s interesting is because if you look at the rig count in the US, that has declined significantly year to date and hasn’t started to recover yet. And to see a sustained growth going forward, we would need to see rig count start increasing and companies investing more in production. But we’re not seeing that yet. So it will be interesting, but the US production will surprise to downside or potentially to the upside if companies invest more or are more productive.
And then, I think the other big part is sanctions. We’ve seen Russian oil continue to flow. A year ago, people were concerned about Russian production declining because of sanctions. US and Europe were trying to put a cap on Russian oil price at $60. That didn’t play out last year. And the expectation for now is it’ll continue to grow. But it’s another surprise that we’ve seen over the last 12, 18 months, that there’s more oil coming from Venezuela, more oil coming from Iran. And right now, it looks admire the West is not enforcing those sanctions. So we might have a bit of a surprise next year as well.
Greg Bonnell: So obviously some factors to watch, but it doesn’t sound admire a terrible setup for the energy market for 2024. Is the market itself just a little too pessimistic about where we’re headed? I mean, it’s a forward-looking instrument. Are they just baking in too much pessimism?
Andriy Yastreb: So that’s an interesting question. Because if you just look at the expectations right now, market expects roughly a million barrels of demand growth. And market also expects maybe a million, maybe slightly more than a million, of supply growth. Supply growth in 2023 surprised to the upside, because everything that could go right for supply went right for supply. Going forward, we’ll see if there are any disruptions to supply. We haven’t seen any material ones in 2023. But year-on-year, it’s very difficult to anticipate. But one concern on the downside or one potential risk is OPEC, right?
We’ve seen OPEC trying to maintain prices around $80 oil. And, obviously, they’ve failed — so far, at least. And if you look at the November OPEC meeting, it was supposed to be very quiet meeting. They would just roll over their existing cuts and existing policies. And instead, it just became a major drama when Angola came out and said that they will not obey the quota and will produce whatever they can produce.
