Researched by Industrial Info Resources--As West Texas Intermediate (WTI) crude oil prices dangle desperately around the $70-per-barrel (BBL) threshold, the month of December finds many in the industry longing for the good old days when the Christmas bonus was expected to be a stocking stuffed with barrels worth a C-note each.
All markets these days are complex and layered, but experts at Industrial Info have listed their top four reasons for this 30% miscalculation on the part of the industry and its investors. Specifically, Industrial Info's Hillary Stevenson says, "With oil being a global commodity, it's no secret that macroeconomics are making the biggest impact."
Specifically, she lists: 1) lackluster Chinese demand, 2) a buildup of U.S. gasoline stocks, 3) the failure of the Israeli-Hamas conflict to go global (thankfully), and 4) market doubts about whether the voluntary OPEC+ supply cuts will materialize.
Demand Woes
As the world's largest energy importer, nothing that happens in China stays in China regarding oil and gas markets. Its struggles against inflation, mulling of economic stimulus packages, and other issues have kept demand from reaching expected levels. This is in spite of the fact that demand did rise somewhat in that country in 2023.
Also, adds Industrial Info's Geoffrey S. Lakings, demand in the U.S. and pretty much everywhere else is failing to live up to expectations. "Earlier this year, nearly everyone missed the true story, which is, 'Where is demand going to come from?' This past summer, U.S. gasoline demand was thought to be showing signs of a long-term trend, but it turned out just to be a temporary recovery," he said. In fact, the U.S. Energy Information Administration (EIA) expects gasoline demand to drop further in 2024, by about 1%, which "would result in the lowest per capita gasoline consumption in two decades," said the agency. It sees remote workers, better fuel efficiency and high inflation among the dampeners on demand.
It's not just the U.S. and China. Lakings adds that Europe is continuing to pivot away from oil and hydrocarbons in general because of their choices regarding the energy transition.
"European choices made about decarbonization have led to an energy crisis that has now led to such high energy costs that Germany is de-industrializing," Lakings says. "And as the EU's single largest economy, if Germany's industry and economy is affected, what could that mean for the EU as a whole?"
Wars and Rumors of Wars
For several weeks after the October 8 Hamas attack on Israel, oil prices were high, reaching around $94 per barrel later that month. Some of that came from fears that the war would spread across the region, interfering with the supply of oil. But, as Stevenson noted, that has not happened-at least not yet. So as supplies continued to flow freely and outstrip demand, prices have fallen into the $70 range.
The Minuses of OPEC+
OPEC+ had earlier agreed to cut its production by 2 million barrels per day (BBL/d) through 2024, with many members combining to voluntarily cut an additional 1.66 million BBL/d from nine members. And in July of 2023, Saudi Arabia pledged an additional 1 million BBL/d of cuts that had been slated to end in December of this year. But last month, Saudi leadership decided to extend that last reduction into the first quarter of 2024.
Other cuts are under consideration, but some disagreement on each member's contribution has delayed any firm agreement. If the market were convinced those cuts would happen, prices might have already risen in anticipation. But, as Stevenson noted, there is much uncertainty as to when or if oil flows will slow.
Previous production cuts did move the price temporarily upward in September and October, Lakings observed, because "the market perceived those cuts were adding to under-supply. But, in reality OPEC+ was cutting because they understood that demand was not actually at levels that would support their desired $80 price."
There are also collisions among crystal balls heading in opposite directions, involving the International Energy Agency (IEA) and OPEC+. In Lakings' opinion, the IEA's predictions of the speed at which the global economy can perform the energy transition are seen through "rose-colored glasses," whereas OPEC+ is of the opposite opinion. If IEA's predictions of a drop in fossil fuel demand in 2024 are indeed right; it could temper prices now, but if lower demand leads to a precipitous drop in production before demand also shrinks, prices could indeed pass $100 per barrel at some point in the future.
The Price Future Burns Brighter?
Lakings said, "Some pundits hope demand will return after the New Year as central bankers determine how best to continue inflation-taming efforts, while at the same time steering their economies away from a crash landing on the rocks of a recession." Another upward push could come from China, should an effective economic stimulus package be enacted in 2024.
Indeed, on December 11, the EIA's Short-Term Energy Outlook called for somewhat higher prices in 2024 while admitting that it was lowering its previous predictions, saying, "We forecast the Brent crude oil spot price will increase from an average of $78 per barrel (b) in December to an average of $84/b in the first half of 2024, partly driven by recently announced OPEC+ production cuts. Despite the announced cuts, we lowered our forecast for the Brent price in 2024."
Meanwhile, consumers are benefitting at least somewhat from lower fuel costs. Historically, lower prices have usually resulted in people getting back on the road and raising demand. But with today's work environment being handed off from Boomers to Zoomers who would rather work from home, the low-price stimulus effect may be dying a slow death.
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).
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