Global oil markets are currently facing a unique combination of factors that are keeping oil traders on edge. While tensions in the Middle East are causing short-term price spikes, the underlying supply and demand dynamics indicate that crude oil prices will likely head lower in 2024.
One of the key factors impacting oil prices is the production cuts implemented by OPEC+, the influential global consortium of oil producers. This decision was driven by concerns about a potential supply/demand imbalance due to increased production from non-OPEC aligned countries. However, oil production has exceeded expectations, and global oil demand is growing at a slower rate than anticipated. This has set the stage for a potential oversupply situation.
While OPEC+ has managed to maintain supply-demand balance and stability in oil markets through these production cuts, the reality is that high prices incentivize commodity production, particularly in the oil sector. OPEC+ does not have enough control over global production to counteract the basic principle of commodities trading: 'High prices are the cure for high prices.' If it weren't for the fears of major military conflict in the Middle East disrupting oil supply, prices would likely be much lower.
Currently, OPEC+ is facing significant pressures, including cracks in their alliance. Angola recently left OPEC, and it is not the first nor will it be the last member to do so. Historically, OPEC has experienced member departures during times of oversupply, as countries face the choice of reducing oil sales in line with OPEC's goals or leaving the organization to maximize their own oil revenues. However, increasing production levels at lower prices only perpetuates the cycle of oversupply, pushing prices down further and pressuring more OPEC members to leave or disregard production restrictions.
In terms of global oil supplies, there is currently an abundance of oil available, and idle excess global production capacity is quite high. The U.S. Energy Information Administration's January 2024 report predicts that global oil inventories will build in the coming months as demand growth slows while supply growth rises. This combination sets the stage for lower oil prices. It is only the fear of disruptive warfare in the Middle East that is preventing prices from falling below the current range of around $70 to $90 per barrel.
Of course, if tensions continue to escalate and military conflict disrupts the flow of oil from the Middle East, there may be short-lived price spikes. However, long-term prospects indicate that oil prices will remain elevated for a temporary period, prompting all oil producers, including OPEC+ members, to increase production. As a result, oil prices will ultimately head lower, with WTI prices potentially reaching around $50 in 2024.
In summary, global oil markets are currently being influenced by tensions in the Middle East, which are causing short-term price increases. However, the underlying supply and demand dynamics indicate that crude oil prices will likely decrease in 2024. The production cuts implemented by OPEC+ to address potential oversupply have not been sufficient to counteract the impact of increased production from non-OPEC aligned countries. While the fear of disruptive warfare in the Middle East is temporarily keeping prices elevated, the market fundamentals suggest that oil prices will eventually decline.
