Sharp fluctuations in oil markets amid geopolitical tensions
Crude oil prices concluded 2023 with the largest annual decline since 2020, dropping by about 10%, as concerns related to increased supply in the market from non-OPEC+ record production dominated.
According to the International Oil Report, crude oil witnessed its biggest annual decline since 2020, as wars and OPEC+ production cuts were unable to push prices higher in a year dominated by supply growth from outside the group.
The report noted a 0.2% decrease in West Texas Intermediate crude, settling just below $72 per barrel on Friday, closing 2023 nearly nine dollars lower than where it began the year.
Additionally, the broader Bloomberg Commodity Index fell about 10% over the past 12 months.
The report highlighted that oil prices retreated after official US data showed that inventories at the main storage hub in Cushing, Oklahoma, expanded for the 11th week to reach their highest levels since August, while US crude production was running at a record pace.
The report indicated that crude oil concluded a tumultuous year, with prices rising due to the outbreak of war in the region and speculation that the Federal Reserve had finished raising interest rates amid declining inflation.
The report added that despite repeated cuts in supplies by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, an increase in production from non-OPEC countries, coupled with concerns about slowing demand growth, converged to push futures for crude oil lower. The report quoted Energy Specter confirming that many traders and speculators were severely affected this year because trading was not easy and highly volatile.
The report also noted that traders faced escalating tensions in the Red Sea after attacks by Houthi rebels on ships in Yemen. Now, half of the world’s container ship fleet regularly avoiding this route, as well as crude oil tankers being diverted, leading to longer voyages.
On the other hand, the international oil report from “Oil Price” mentioned that oil prices experienced a slight increase on Friday, the last trading days of the year, with a 10% decline recorded for the year. The report noted that oil prices have now dropped by around 20% since their highest level in 2023, which exceeded $90 per barrel.
The report explained that concerns about economies and oil demand, coupled with rising interest rates, have pushed oil prices down by 10% this year. This marks the first annual decline since 2020, despite production cuts by “OPEC+” and the outbreak of a new war in the Middle East.
The report emphasized that crude oil has witnessed increased volatility this year once again. While concerns about demand led to price decreases, the cuts by “OPEC+” and additional Saudi cuts partially offset the price decline.
The report indicated that oil supplies from outside OPEC, led by the United States, grew faster than previously expected. The increase in production from outside “OPEC+”—including contributions from Brazil, Canada, Norway, among other countries—prompted analysts to revise their projections for a market deficit in the early part of the coming year.
The Chinese economy was also cited in the report as a significant concern for participants in the oil market. Mixed reports on manufacturing activity and crude oil imports, coupled with the impact of rising interest rates in the United States, fueled worries that interest rate hikes could lead to a recession, resulting in decreased oil demand.
The report mentioned that despite the Federal Reserve indicating the possibility of three interest rate cuts in 2024, which could boost economic growth and oil demand, analysts anticipate continued volatility in the coming year due to geopolitical tensions.
The report cited an international survey indicating that the expected weak global economic growth is likely to result in a slowdown in oil demand growth next year. This keeps the average benchmark U.S. oil price below $80 per barrel, as analysts revised down their 2024 expectations compared to the previous month.
According to the report, the recent slowdown in holiday season industrial news halted the recent uptick in oil prices. Brent crude futures slightly dropped to $78 per barrel. Meanwhile, a few market participants ignored the sizable drawdown of seven million barrels from U.S. oil inventories.
The report highlighted that China eased restrictions on fuel oil refining, with the Chinese government setting its share of fuel oil imports for 2024 at a total of 20 million tons, a 4% increase from 19.2 million tons last year. This move was in response to calls from independent refining companies to relax controls on fuel oil, which is frequently used as a raw material for refining in China.
The report highlighted the shift of U.S. diesel to Europe, noting that, according to “Kpler” data, American exporters shipped around 470,000 barrels per day of diesel to Europe, marking the highest monthly level ever across the Atlantic.
On another note, regarding prices at the end of last week, oil prices concluded 2023 with the largest annual decline since 2020, approximately 10%. Fears related to an increase in supply in the market from record production outside OPEC dominated, and U.S. crude ended the year at $71.65 per barrel, losing about 10.73% throughout the year, marking its first annual decline since 2020. Similarly, Brent futures ended the year at $77.04 per barrel, with a 10.32% loss for the year.
The year 2023 witnessed sharp fluctuations in oil prices against the backdrop of geopolitical tensions that characterized the year. Developments related to production, both in terms of OPEC and its allies’ decisions and non-OPEC production, also contributed to the volatility in oil prices.
Regarding the estimates for the upcoming year 2024, Andrew Lipo, the president of Lipo Oil Associates, stated, “We will witness continued volatility as we enter 2024, with geopolitical events continuing to dominate market sentiment.”
“OPEC+” is currently reducing production by about six million barrels per day, representing approximately 6% of global supply.
OPEC faces an expected weakening of demand for its crude in the first half of 2024, with its market share dropping to the lowest level since the pandemic due to production cuts and Angola’s exit from the alliance.
According to a survey conducted by Reuters with the opinions of 34 economists and analysts, the average Brent crude price is expected to be $82.56 in 2024, down from the November average of $84.43. They anticipate that global economic slowdown will curb demand, while geopolitical tensions could provide support. On the other hand, the total number of active drilling rigs in the United States increased by two this week.
A report from Baker Hughes on Friday stated that the total number of drilling rigs rose to 622 this week. Since this time last year, Baker Hughes has reported a net loss of 157 active drilling rigs. The current number of drilling rigs is 452 less than the number at the beginning of 2019, before the pandemic.
The report highlighted an increase in U.S. production by 1.377 million barrels per day, according to the latest data from the Energy Information Administration.
The report noted a rise in the number of oil rigs by two to a total of 500. The current number of oil rigs is now 121 less compared to this time last year. Meanwhile, the number of gas rigs remained unchanged at 120 this week, with a loss of 36 active gas rigs compared to the same time last year. The miscellaneous rigs remained unchanged at two.
