Despite repeated OPEC plus output cuts and Israel-Hamas conflict, oil prices shed more than 13 percent in 2023 against its previous year’s average price. However, prices exhibited a varied move throughout the year driven by multiple factors that affected its fundamentals.
US NYMEX oil started at nearly $80 a barrel in 2023 but pushed down to $64 levels by May. There was a brief rally in October, which coincided with the Israel-Hamas conflict and reports of falling US inventories but erased all such gains by the end of the year.
The new geopolitical risk in West Asia was speculated to raise global oil prices as the region is one of the most important oil-producing and transporting zones. However, demand concerns due to the moderate global growth outlook, and higher-than-expected supply from non-OPEC countries were the key drivers of oil markets last year.
The OPEC plus countries announced voluntary production cuts in May and November last year. The cuts were aimed at stabilizing the market and supporting prices. However, these aggressive moves have failed to lift global oil prices.
Rising oil supplies from non-OPEC countries, especially from the US offset the price-boosting efforts taken by OPEC Plus producers’ cartel.
The US is the world’s largest oil producer and their production level hit a historic high of over 13 million barrels per day in 2023. As per Energy Information Administration (EIA), US production is expected to rise in the next two years as well.
Oil markets have also adjusted to the ban on Russian oil by the European Union and G7 countries faster than initially expected. Russia diverted most of its cargo to destinations in Asia, especially China and India. Russia was the largest supplier of crude oil to India last year, beating the traditional Middle East heavyweight countries like Saudi Arabia and Iraq.
China was supposed to be the driving force of global oil demand growth last year, but challenges in its economy adversely affected the demand from the world’s second-largest oil consumer. China’s economy has been going through challenges in areas like the property sector, exports, debt, unemployment, and investment affected the overall demand for energy commodities.
Oil prices will continue to be driven by demand-supply dynamics in 2024 as well. As the current fundamentals remain unsupportive, there are very few chances for a sharp rise in prices barring a major escalation of tensions in the Middle East, which could negatively affect the global oil supply chain. Though the shortage in output from OPEC-plus countries continues to be replaced by higher US production, further surprise production cuts or supply issues due to the escalating tension in the Middle East would be crucial for the market.
A weak global growth outlook, especially from China and Europe may also restrict major upsides. Whereas the US Fed’s stance on inflation and interest rates will significantly influence oil demand. Stable or reduced interest rates could promote economic growth, potentially increasing oil demand and thus the prices of the commodity.
On the price side, considering various factors, the US WTI futures may vary inside $64-98 a barrel. At the same time, in the domestic market, in addition to the international prices, volatility in the Indian rupee would have an impact on the price outlook.
(The author is Head of Commodities, Geojit Financial Services)