In 2024, the price of a barrel of oil will be supported by geopolitics and OPEC+

2023-12-25 23:08:00

In 2023, the price of a barrel of Brent oil (at closing) has never fallen below 70 dollars (71.3 dollars lowest in June) and has not managed to rise to 95 dollars (93 .2 dollars in September), far from the peak of 120 dollars reached in June 2022. It oscillated according to the production restrictions of OPEC + – the alliance bringing together the 13 members of OPEC (but which will leave Angola) and 10 other exporting countries including Russia, and which Brazil will join from January 1st – and risks of economic recession in many countries in the coming months, synonymous with contraction in oil demand, while reacting to geopolitical events.

The effect of embargoes

Thus, in March, reductions in exports of Russian crude and refined products subject to a European embargo and the G7 and its allies’ capping of the price at $60 per barrel had caused the barrel of Brent to gain $11 per barrel in one month. Between July and September, announcements of reductions in exports from Saudi Arabia (- 1 mb/d) and Russia (500,000 bpd) led to an increase of 22 dollars in three months to reach a peak in mid -September, at more than 93 dollars before taking a downward trend until mid-December, falling to 72 dollars, with the parenthesis of the deadly Hamas attack on Israeli soil on October 7, which made it gain more than 9 dollars in 10 days on the fear of a conflagration in the region where some 40% of the world’s black gold production is concentrated. Since mid-December, the barrel of Brent has gained 7 dollars, supported by attacks by the Houthis, the Yemeni rebels, who threaten international maritime transport in the Red Sea, in particular tankers.

Divergence on demand between OPEC and the IEA

These factors make it increasingly difficult for market players to understand changes in demand. Thus, 2024 should beat the historic record for global crude consumption already established in 2023. But, the source of these difficulties, the projections of the International Energy Agency (IEA) and OPEC diverge greatly. The first predicts that we will burn on average 1 mb/d more in 2024 than in 2023, or 102.8 mb/d, while the second predicts an increase in needs next year of 2.2 mb/d, or 104.3 mb/d. A difference which can be explained by the growth prospects of emerging countries. “Growth in global oil demand next year will likely be driven by the most dynamic emerging economies in the developing world, particularly in Asia”indicates Jean-Pierre Durante, analyst at Pictet Wealth Management.

The two institutions, however, rely on the same figures for global GDP, a deceleration to 2.6% in 2024, following 2.8% in 2023. Sluggish growth weighed down by the increase in rates decided by the central banks in the majority of OECD countries to curb inflation which is at its highest in 40 years, but which is weighing on economic activity.

The oil market is also closely dependent on OPEC+ policy which more or less influences its direction. If the production cuts agreed to stabilize the price of a barrel above $80 work – but at the cost of losing market share – they also paradoxically present a bearish factor for investors on the futures markets. Indeed, OPEC finds itself with a dormant production capacity which, according to evaluations, is between 4 mb/d and 5.5 mb/d, enough to reassure the market which knows that in the event of strong supply disruption, OPEC, particularly Saudi Arabia and the United Arab Emirates, will be able to quickly respond to needs.

Sharp increase in production in non-OPEC+ countries

In the meantime, OPEC+’s policy of volume control is thwarted by the increase in production to a record level in the United States, but also in Brazil, Canada, Guyana – certain oil fields of which are contested by the Venezuela, source of tensions in the region – or even in Iran, member of OPEC but not subject to a quota because it is subject to international sanctions (like Venezuela and Libya) which partly nip it in the bud the cartel’s efforts to keep prices above $80. Thus, on December 20, the price of a barrel of Brent stood at 80 dollars, that of WTI at 75 dollars.

There remains another uncertainty: geopolitical tensions. They can very quickly add a risk premium to the price of a barrel, which might propel the barrel above 100 dollars. “Our price modeling indicates that a change of one million bpd in the balance between oil supply and demand would cause an increase of more than $20 per barrel, allowing oil prices to cross the $100 mark. However, we believe the US and China want to avoid such a scenario and, from OPEC+’s perspective, a price spike would likely accelerate the global shift away from oil.explains Jianwen Sun, strategist at the Swiss banking group Lombard Odier.

Fossil fuels represent 82% of primary energy

Indeed, since the agreement reached at COP 28 in Dubai (United Arab Emirates) in December, fossil fuels are now explicitly designated as responsible for a large part of greenhouse gas (GHG) emissions, the main cause of climate change. “The direction is clear”welcomed the executive director of the IEA, Fatih Birol, for whom the agreement says “goodbye to fossil fuels”. But, in the short term, it should not have any effect because the world is too dependent on them. They still represented 82% of primary energy in 2022, according to the latest report from the Statistical Review of World Energy, including 31.6% for oil, 26.7% for coal and 23.5% for natural gas. Enough to still give producers some breathing room.