Affected by the imbalance between crude oil supply and demand, investors have become increasingly less confident in OPEC+’s ability to balance the market. In 2023, oil prices fell for the first time since 2020. And this decline has not ended at the beginning of 2024.
According to the latest data, Brent crude oil fell below $75 a barrel on Wednesday (3rd),WTI crude oilIt fell below $70, both for the first time since mid-December.
Oil prices continue to fall, as investors increasingly lack confidence in the balance between supply and demand.
On the one hand, the crude oil production of the United States and non-OPEC+ countries has become the biggest surprise, and the global oil market is under pressure. U.S. oil companies are vigorously extracting crude oil. Weekly crude oil production hit a record high last month, reaching 13.3 million barrels per day, far exceeding analysts’ expectations. And according to the U.S. Energy Information Administration (EIA), U.S. crude oil production will continue to hit a record high in 2024.
In addition to the United States, Brazil and Guyana are also expected to significantly increase crude oil production. The new supply poses a challenge to OPEC+, which recently pledged to voluntarily cut output by 900,000 barrels per day to stabilize oil prices. However, the market has doubts about whether OPEC+ can fully implement production cuts to eliminate overcapacity.
Parsley Ong, head of Asia energy and chemical research at J.P. Morgan, said: “U.S. crude oil producers are very price-sensitive. When OPEC+ raises oil prices by cutting production, U.S. producers will take advantage of higher oil prices to increase production. This will in turn lead to a decline in the market. Increased crude oil supply may offset the effect of OPEC+ production cuts. OPEC+ is facing a “balance problem” between crude oil production and prices.”
On the other hand, although global crude oil demand is gradually recovering, the increase in global demand for crude oil is slowing down. According to the latest market outlook from the International Energy Agency (IEA), crude oil demand is forecast to increase by 1.1 million barrels per day in 2024, less than half of the expected value in 2023.
Secondly, market speculation has intensified oil price fluctuations, and oil prices are out of touch with market supply and demand fundamentals. For example, on at least two occasions in 2023, money managers, including hedge funds, established large short positions in oil prices ahead of OPEC+ meetings. There was another massive sell-off when OPEC+ announced production cuts.
Algorithmic trading that has nothing to do with fundamentals accounts for nearly 80% of the daily trading volume of oil prices. This type of automated trading is increasingly exacerbating market uncertainty. And a wave of consolidation among crude oil producers is weakening the link between futures markets and actual physical crude flows. This can lead to a disconnect between futures prices and actual market supply and demand conditions.
Additionally, as electric vehicles (EVs) gain popularity, the oil segment is turning to other energy alternatives.
Anthony Yuen, head of energy strategy at Citigroup, noted: “In the past, economic indicators may have translated directly into increased ground transportation and fuel demand, but now this relationship appears to be weakening. In China, Asia’s largest crude oil importer, vehicle electrification poses a significant impact on oil consumption. Structural resistance has dragged down the growth of crude oil demand.”
As for whether the decline in crude oil will end? Trevor Woods, Chief Investment Officer of Northern Trace Capital LLC, a commodity asset management company, believes: “There will still be great uncertainty in the crude oil market in 2024. The crude oil market relies heavily on the support of OPEC and its allies. If the production reduction agreement reached by OPEC collapse, then oil prices could plummet.”
2024-01-03 12:08:00
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