Oil market update - Oil hits five-month low despite additional cuts
Brent price witnessed an average 6% drop during December and early January, hitting a new five-month low of 72.6 USD/barrel. The impact of the additional OPEC+ voluntary cuts was dominated by more supply from the US and concerns about demand because of sluggish global growth. Geopolitical risks have so far had a limited impact but the situation could shift any moment as tensions accumulate.
Oil prices witnessed an average 6% drop during December and early January, with a 40 day average of 77.6 USD/barrel, while hitting a five-month low of 72.6 USD/b. The decline was driven mainly by the pessimistic economic outlook for the first half of 2024 in major markets and additional supply flowing from producers outside OPEC+ such as the USA.
OPEC+ membership witnessed some changes with Brazil announcing its intension to join the cartel this year and Angola withdrawing its 16 years membership following disagreements on the country’s production quota. The impact of the exit of Angola on prices has been very limited since the country was already operating at maximum capacity and new investments are still uncertain. While the impact of the accession of Brazil is yet to be seen as more information on its production is still to become available.
From the supply side, the announcement of additional voluntary cuts by OPEC+, with a total of 2.2 million barrels per day, was not well received by the market because of ambiguities surrounding the practical implementation of such cuts. Furthermore, additional supply by the US and some countries in Latin America have put a lid on prices so far. While the market is expected to be in a surplus this year, Saudi Arabia indicated the possibility of the extension of the cuts beyond March if market conditions necessitate that. However, the market so far seems to doubt the ability of OPEC+ to deliver sufficient cuts to offset the looming surplus.
Geopolitical risks and the attacks by the Al-Houthi group on cargos passing through to the Red Sea have so far had a limited impact in terms of supply disruptions. However, the market is vigilant and the situation may shift any moment because of the accumulation of geopolitical tensions which could affect exports from Iraq, Libya, and Iran.
Demand is foreseen to stay low in the coming months as sluggish economic growth is expected to take place in the first half of 2024 in main markets, including China, the EU and the US, where interest rates cuts are widely anticipated to take place around the middle of the year.
Outlook
Given the current market conditions, our outlook for Brent is to average 80 USD/b for the first quarter of 2024. Following the expected cuts in interest rates, which should increase expectations of a recovery in demand, we expect Brent to reach 90 USD/b by the end of 2024.