Global oil prices broke out of their $75-$85 per barrel range in the last week of March, trading at their highest level so far this year as the market turned volatile. After a period of relative stability since the start of the Gaza war in October, oil prices rose to $90 per barrel on April 2, the highest level so far this year. The spike was due in part to heightened security risks in the Middle East, and because of tight fundamentals as the OPEC+ group kept a lid on supplies.
Demand forecasts
The market saw the slight upward revision to oil demand by the International Energy Agency as bullish. The IEA, in its March Oil Market Report, revised its demand forecast for 2024 upward by 110,000 barrels per day (bpd) to 1.33 million bpd, a small adjustment over the previous month.
OPEC, in its March Monthly Oil Market Report, is more bullish. It sees demand growing by 2.25 million bpd in 2024, a forecast unchanged since last July.
Some analysts expect oil prices to trend higher, mirroring gold and bitcoin, both of which have traded at all-time highs. “The oil market is a financial asset more than a commodity,” said Omar Najia, global head of derivatives at BB Energy, in a March 25 podcast hosted by the Gulf Intelligence. Oil is higher “because cash is searching for a home so all markets go up.”
Standard Chartered is also bullish on oil prices, saying in a February 27 research note that it expected to see Brent “move above $90 per barrel in coming months.”
The upward revision by the IEA, though small, is another indication of the diverging views between the energy consumer watchdog and OPEC. The IEA’s back-pedaling and the IEA’s Executive Director Fatih Birol’s continuous assertion that demand for oil will peak by the end of the decade has caused a rift between the two organizations. It has also blurred the picture for traders and analysts trying to reconcile competing outlooks.
OPEC’s expectations
Amin Nasser, the CEO of Saudi Aramco, on March 10 provided his own assessment, which was closer to the IEA’s than to OPEC’s forecast. “With regard to the oil demand, we expect the global oil market to remain healthy over the remainder of this year,” Nasser said on March 10 while presenting the company’s 2023 financial report. “We’re looking at a growth of about 1.5 million barrels [per day] … and so I consider supply/demand to be in reasonable balance during the remainder of the year,” he added.
OPEC can take heart from a recent independent report issued by the U.S. Federal Reserve Board. The report, dated January 10, stated that findings by its three authors suggest “OPEC communication is based on fundamental factors and generates a credible public signal. In particular, we find that OPEC topics reduce volatility levels, in line with OPEC’s mandate of market stabilization, and induce market participants to rebalance their positions.”
The authors concluded that “OPEC communication reduces oil price volatility and prompts market participants to rebalance their positions,” and that “market participants assess OPEC communications as providing an important signal to the crude oil market.”
Saudi Energy Minister Prince Abdulaziz bin Salman has been critical of the IEA’s revisions, which he says are damaging. He has previously blamed speculators for causing market volatility, warning them not to bet against OPEC. The OPEC+ alliance, by being proactive and providing long-term guidance, wants to prevent volatility in oil prices, which distorts the market and complicates investment decisions, he has said. “I think that over the last six, seven months, we have been proven to be a responsible regulatory institution,” Abdulaziz said at the Qatar Economic Forum in May 2023.
Supply tightening
Oil prices had been trading in a range either side of $80 per barrel even after eight OPEC+ producers, led by Saudi Arabia, announced in early March that they would extend oil production cuts of 2.2 million bpd, already in place since January, by a further three months.
Riyadh said on March 3 that it would be extending a voluntary 1 million bpd cut, which came into effect in July 2023, until the end of June. The decision to prolong the supply cuts to mid-year has been motivated by the strength of production growth from producers outside the OPEC+ alliance, particularly from the U.S., rather than by weak demand projections.
OPEC said in announcing the cuts that supply would be “returned gradually subject to market conditions.” Should oil prices remain elevated, the OPEC+ group of 22 producers might consider easing some of the supply curbs during the second half of the year.
Read: LNG market disrupted by Red Sea crisis, prices fall sharply
Persistent Red Sea crisis
Aside from supply restrictions, the market has been volatile due to persistent attacks on shipping in the Red Sea by Houthi rebels in Yemen. There have been more than 50 serious attacks targeting tankers and commercial ships since early November. This has forced a redirection of tankers around the Cape of Good Hope, causing freight rates to rise.
The oil market had previously held steady because there have been no production losses and no impact on exports due to Houthi attacks. However, a redirection of maritime traffic is proving costly. In recent weeks, the geopolitical risk has intensified as the Houthis threatened to attack Saudi oil installations and Ukraine stepped up drone attacks on Russian refining centers, knocking out some 1 million bpd of refining capacity by some accounts. The deadly attack on an Iranian diplomatic compound in the Syrian capital Damascus on April 1 which Tehran blamed on Israel, also raised geopolitical tensions.
On March 25, the Houthis said they would target Saudi oil installations if Riyadh allowed the U.S. and its allies to use its airspace to strike Houthi positions. “We have sent a message to Saudi Arabia that it will be a target if it allows American fighter jets to use its territory or airspace in their aggression on Yemen,” Mohammed Ali al-Houthi, a member of the group’s Supreme Political Council, said on al-Masirah TV.
Supply chains strained
With vessels using the longer routes between Europe and Asia, supply chains are being stretched. This is pushing ship operators to increase the speed of their vessels, thereby boosting demand for bunker fuel. The IEA highlights the impact of these diversions on the first quarter, and its revisions are leaning toward the first half of the year. However, with the Houthis showing no sign of halting their attacks, further upward oil demand revisions are still possible.
About Kate Dourian
Kate Dourian is a non-resident fellow at the Arab Gulf States Institute in Washington. She is also a fellow at the Energy Institute. Previously, she was the regional manager for the Middle East and Gulf states at the World Energy Council. Dourian joined the IEA from the Middle East Economic Survey where she was a senior editor. She was also responsible for compiling the monthly OPEC survey for MEES. From 2000-13, Dourian was the editor-in-chief for the Middle East for oil price reporting agency Platts.
Dourian has been a speaker and moderator at international conferences and has made many radio and television appearances, discussing energy and geopolitics on several platforms in English, Arabic, and French.
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