Key Influential Factors in Oil Prices During 2023
The oil markets experienced dramatic fluctuations during 2023, in light of various factors that exerted pressure on prices. These factors included decisions related to production by OPEC+ and production volumes outside of it, U.S. inventories, as well as the impact of economic data, interest rate decisions, and the prevailing uncertainty throughout the year regarding the Federal Reserve’s timeline for the end of its monetary policy tightening cycle.
Factors associated with “demand” also influenced oil prices throughout the year, especially concerning demand from China. The beginning of the year saw optimism for a new recovery in the world’s second-largest economy after the end of the “Zero-COVID” policy.
Among the prominent factors that necessarily influenced oil prices were geopolitical factors and concerns accompanying several relevant crises. This includes the war in Gaza, which erupted in the beginning of the fourth quarter of the year, specifically on October 7, 2023. It raised pressures and concerns related to supplies, including the recent tensions in the Red Sea and their effects.
While production cuts by OPEC and its allies are viewed as the most decisive factor in achieving market balance throughout the year.
The member countries of OPEC+ have taken a series of measures, including production cuts since late 2022, to support the market.
In this chronological sequence, the website ‘Economy Sky News Arabia’ reviews the development of oil prices in 2023 and the associated reasons for each month. It provides a summarized overview of the key events in the sector that influenced supply and demand as the primary governing factors for prices.
January… First Monthly Losses of the Year
In the first month of 2023, oil prices recorded monthly losses despite the overall optimism in the markets regarding the recovery of the Chinese economy. This was accompanied by a reduction in the impact of U.S. and Western economic sanctions on the oil sector in Russia.
Brent crude futures posted losses of 0.6% in January, reaching levels of $85.44 per barrel by the end of the month. Additionally, U.S. crude experienced a monthly decline of 1.7%, concluding the month at $79 per barrel.
Oil prices witnessed widespread downward pressures, with investors’ attention focused on crucial economic data. Foremost among them was the anticipation of the next decision by the Federal Reserve regarding interest rates. Additionally, market watchers were keen on data related to the rise of the dollar index and its implications for oil markets. At that time, the market was also awaiting recommendations from an upcoming virtual meeting of ‘OPEC+’ scheduled for the first of February.
February… Optimism Regarding the Recovery in China
In the second month of the year, oil prices continued their losses. Brent crude futures recorded a decline of 2.7% in February, concluding the month at $83.09 per barrel.
Similarly, futures contracts for U.S. crude also experienced a decline of 2.8%, finishing the month at $76.78 per barrel.
While prices gained in some sessions, supported by a sense of optimism amid the recovery in demand in China.
In February as well, OPEC’s oil production increased, supported by the recovery of supplies in Nigeria. OPEC pumped 28.97 million barrels per day during the month (representing an increase of 150,000 barrels per day compared to January).
March… Quarterly Losses
In March 2023, Brent crude recorded monthly losses of 4%, contributing to quarterly losses of around 5% in the first quarter of the year.
The same holds true for U.S. crude, which experienced monthly losses of 1.5% in March and quarterly losses of 4.7% in the first quarter.
Markets faced widespread concerns about the ‘U.S. banking crisis,’ casting a shadow over financial markets. However, these concerns eased as worries about the situation escalating into a global banking crisis diminished following measures taken in the United States to protect depositors’ funds and rescue banks.
It’s noteworthy that oil prices during the month reached their lowest level in 15 months amid the disruptions faced by the banking sector. The turmoil, which persisted for weeks, stirred broad confusion, with concerns about the ‘domino effect’ impacting other banks and smaller financial institutions.
April… Voluntary Production Cut
The first month of the second quarter in 2023 witnessed a significant development in the markets related to the announcement of a voluntary production cut by major producers within OPEC+.
The total voluntary cut amounted to 1.16 million barrels per day, effective from May until the end of the year, with the aim of ‘achieving market balance’ following the widespread declines in oil prices in the first quarter of the year.
In April, prices continued to decline, with Brent crude reaching levels below $80 per barrel during the month. However, it managed to record monthly gains of around 0.6% by the end of the month. Meanwhile, West Texas Intermediate (WTI) crude recorded gains of about 1.3%.
May… Significant Losses
In the fifth month of the year, oil prices incurred sharp losses in May. Brent crude dropped by over 10%, concluding the month at $72.09 per barrel.
Similarly, West Texas Intermediate (WTI) crude declined by approximately 11.8%, finishing the month at $67.55 per barrel.
During the month, attention was particularly focused on an upcoming OPEC meeting in June amid uncertainty about potential production policies.
June… Monthly Gains, and the ‘Quarterly Losses’ Series Continues
In June, before the end of the first half of the year, the OPEC+ alliance, consisting of OPEC member countries and non-member countries led by Russia, agreed on a new production target of 40.46 million barrels per day starting from 2024 until the end of 2024.
As a result, alliance members reduce the targeted production level for the year 2024 by 1.4 million barrels compared to the production targets at that time.
It is noteworthy that the alliance had also decided last October to cut production by about two million barrels per day.
During June, oil prices achieved their first monthly gains since the beginning of the year, supported by a widespread decline in U.S. inventories. However, they continued the quarterly loss trend for the fourth consecutive quarter.
For Brent crude, it recorded monthly gains of 4.2%, but registered a quarterly loss of about 3.4% in the second quarter of 2023, ending trading at $75.10 per barrel.
As for U.S. crude, it posted monthly gains of 4.2%, but overall recorded losses of 3.7% during the second quarter, concluding trading at $70.39 per barrel.
July… Strong Monthly Gains for Oil Prices
Oil prices recorded strong monthly gains in July, marking the second consecutive month of increases. Monthly gains reached around 16%, supported by voluntary production cuts by OPEC+ and expectations of the Federal Reserve’s tightening cycle coming to an end, which dominated the markets at that time.
Brent crude futures rose by 13.5%, concluding the month at $85.21 per barrel. Additionally, futures contracts for U.S. crude increased by 16% in July, ending trading above $81 per barrel (approximately $81.72 per barrel).
August… Oil Prices Achieve Gains for the Third Consecutive Month
In August, oil prices recorded new gains, marking the third consecutive month of increases in 2023. The gains were supported by a significant decline in U.S. inventories as well as production cuts from OPEC+.
Brent crude futures concluded the month at $86.78 per barrel, with a monthly gain of 1.8%.
Similarly, futures contracts for West Texas Intermediate (WTI) crude ended the month at $83.54 per barrel, with a monthly gain of 2.2%.
Markets were anticipating the next OPEC meeting, with expectations of voluntary production cuts from Saudi Arabia in October, in addition to the recent cuts by OPEC and its allies.
September… Monthly and Quarterly Gains
By the end of September, oil prices achieved new monthly gains, as well as strong quarterly gains in the third quarter of 2023.
Brent crude futures concluded the month and the third quarter with gains, reaching the highest level at $95.91 per barrel. The monthly gains were estimated at around 6%, and the quarterly gains amounted to over $20 (18.3%).
Futures contracts for U.S. crude recorded monthly gains of 8.6%, reaching $90.79 per barrel after touching $95 per barrel as the highest level during the month. Strong quarterly gains were also noted, estimated at approximately 21.8% (nearly $16).
October… New Monthly Losses with Consideration of ‘Geopolitical’ Factors
Brent crude futures declined to $85.5 per barrel by the end of October, marking a monthly decrease of 7.15%. Similarly, futures contracts for U.S. crude decreased by 10.4% during October, reaching $81.31 per barrel.
During the month, the production of the OPEC organization increased for the third consecutive month by 180,000 barrels per day. OPEC countries pumped 27.9 million barrels per day, supported by production from Nigeria and Angola.
Geopolitical factors, associated with the Gaza war and its aftermath, exerted pressure on oil prices during the month.
November… Voluntary Reductions
At the end of November, Saudi Arabia and a group of major producers in the OPEC+ alliance announced additional voluntary production cuts totaling around 2.2 million barrels per day. The implementation of these cuts is set to begin in the first quarter of the upcoming year, with the aim of supporting the stability and balance of oil markets.
These voluntary reductions come in addition to other voluntary cuts announced earlier in April 2023, which were later extended until the end of 2024.
On a monthly basis, futures prices for Brent crude decreased by 6% (ending the month at $80.39 per barrel). Similarly, futures contracts for U.S. crude decreased by 7% in November, reaching $75.57 per barrel.
December… Year-end
As the year comes to a close, oil prices are heading towards incurring annual losses of around ten percent, marking the first annual decline in two years. Geopolitical concerns, production cuts, and global measures to curb inflation have caused sharp fluctuations in prices.
Futures contracts for U.S. West Texas Intermediate (WTI) crude are set to register a monthly loss of about 4.3%, while futures contracts for Brent crude are heading for a monthly loss of over three percent.
Thus, the two benchmark crudes are poised to end the year with the largest percentage loss since 2020 when the COVID-19 pandemic undermined demand and led to a decline in prices.
Key Outlook for the Year 2024
The Organization of the Petroleum Exporting Countries (OPEC) has expressed cautious optimism about the fundamental factors impacting the oil market in 2024. Earlier, it mentioned that the recent decline in prices was due to ‘exaggerated concerns’ about demand while maintaining relatively high expectations for oil consumption in 2024.
OPEC has kept its forecasts for global oil demand growth in 2023 at 2.46 million barrels per day. It has also reaffirmed its expectations from the previous month for demand growth in 2024 at 2.25 million barrels per day.
Estimates from Standard & Poor’s Global indicate that oil prices are expected to remain in the range of $70 to $80 per barrel next year. These expectations are attributed to the ‘weak global demand for crude,’ despite OPEC+ production cuts.
Goldman Sachs, on the other hand, points to levels between $70 to $90 per barrel, supported by production from outside OPEC, specifically from the United States. This production is said to alleviate any potential price hikes.
The latest projections from the U.S. Energy Information Administration for oil prices in 2024 indicate a level of $78 per barrel, compared to previous expectations of $89 per barrel, reflecting a 13% decrease. As for Brent crude, the administration raised its expectations to $84 per barrel from $78 per barrel, representing an 8% increase in the first half, citing OPEC+ production cuts. Overall, the average annual forecast for Brent crude, according to the administration’s estimates, is $83 per barrel.
