Geopolitical tensions in the Middle East are keeping the oil market on edge at the beginning of the new year. It’s because of the high risk of potential supply disruptions from the region. The Middle East constitutes a third of global seaborne oil trade. This is according to the International Energy Agency‘s first Oil Market Report of 2024. The IEA assesses that, in the absence of actual production losses, the market seems well-supplied this year.
Impact on oil market
“At the start of 2024, the risk of global oil supply disruptions from the Middle East conflict remains elevated, particularly for oil flows via the Red Sea and, crucially, the Suez Canal,” it noted. Strikes by the U.S. and the U.K. against Iran-backed Houthi rebels in Yemen followed dozens of attacks on Red Sea shipping by the Houthis. These “have raised concerns that an escalation of the conflict could further disrupt the flow of oil via key trade chokepoints.”
Houthi rebels have carried out dozens of attacks on ships in the Red Sea since November. This is ostensibly in support of the Palestinians in Israel’s war against Gaza. Oil prices rose above $80 per barrel shortly after retaliatory strikes by the U.S. and the U.K. against Houthi positions in Yemen. They moved higher after a Houthi missile strike set an oil products tanker on fire on January 26. Oil was traded at just under $84 per barrel.
The IEA reported that in 2023, around 10 percent of the world’s seaborne oil trade sailed through the Red Sea. This is equivalent to about 7.2 million barrels per day of crude oil and refined products, and 8 percent of the global liquefied natural gas trade. Several ship operators and certain oil companies, including Shell, BP and Norway’s Equinor, have opted to bypass the Bab al-Mandab strait. They did this in favor of the longer route around the Cape of Good Hope. This resulted in increased freight and insurance costs. It also led to delayed deliveries of goods, potentially exerting inflationary pressure on the economies of importing nations.
Oil outlook
According to the IEA’s January 18 report, oil demand growth for the year will be roughly half the 2023 level. This is due to “below trend GDP growth” in major economies, stepped up energy efficiency measures and electrification of the transportation sector. Demand could grow by 1.2 million bpd this year compared with 2.3 million bpd in 2023. Partly, it’s because of a sharp drop in gasoline use from 720,000 bpd to 150,000 bpd.
Supply tightness in the first quarter due to voluntary production cuts by a handful of OPEC+ producers will give way to a more well-supplied market. Overall supply could rise to a record 103.5 million bpd. This will be led by growth in production from the U.S., Canada, Brazil and Guyana.
Seven OPEC+ producers agreed on the eve of the COP28 climate summit in Dubai on November 30 to implement voluntary supply reductions. Saudi Arabia, the UAE, Iraq, Kuwait, Oman, Algeria and Kazakhstan will cut a total of 2.2 million bpd from January to March. They have the option to extend the cuts if necessary. Russia pledged to slash 500,000 bpd of crude and oil products from average export levels. The country is a key member of the expanded alliance.
Read: Top oil-producing countries in the world
More optimistic forecast
The Organization of the Petroleum Exporting Countries was more optimistic on demand in its Monthly Oil Market Report, which it published a day earlier. The IEA sees “subdued global economic growth.” Meanwhile, OPEC’s assessment is for more robust economic growth of 2.6 percent and a 2.5 million bpd rise in oil demand in 2024.
OPEC did not give a supply estimate for the full year. However, its forecast for growth in non-OPEC supply is consistent with that of the IEA. The MOMR sees non-OPEC liquids production, which includes natural gas liquids, rising by 1.3 million b/d in 2024. This is slightly below the previous month’s assessment. This leaves the “call on OPEC” oil, the volume needed to balance the market, at 28.5 million bpd. This figure is some 800,000 bpd higher than in 2023.
What’s new in this year’s MOMR was the inclusion of a year-ahead forecast for the first time. OPEC sees demand rising “by a robust” 1.8 million bpd in 2025. It will be sustained by “solid economic growth in China” and demand from non-OECD member countries. Non-OECD demand could grow by 1.7 million b/d next year, mostly from China. Meanwhile, OECD growth could rise by just 100,000 b/d.
OPEC+ countries
One of the barometers for the calculations of the OPEC+ countries is the level of global stocks. It can exert a bearish influence on oil prices if they move above historical averages. The IEA said its members, who are required to hold the equivalent of 90 days of import cover at all times, collectively hold stocks of around 4 billion barrels. This figure includes 1.2 billion barrels of government stocks that can be released in the event of a supply emergency. “That buffer should help assuage market jitters and angst among governments, industries and energy consumers.”
Furthermore, the OPEC+ producers hold a healthy spare production capacity cushion that could be brought online. It would normally exert bearish pressure on oil prices.
The IEA estimates that overall output from 18 out of 23 OPEC+ producers subject to quotas was 390,000 b/d below an implied target of 35.46 million b/d in December. This leaves the group’s “effective spare capacity, excluding sanctions-hit Iran and Russia, at 5.4 million b/d, with Saudi Arabia accounting for around 60 percent of the cushion.”
The OPEC+ group, which is led by Saudi Arabia and Russia, will be looking closely at stock levels and how much is drawn down in the first quarter to determine if the cuts should be extended beyond March. The OPEC report points to a drawdown of 570,000 bpd in global inventories during the first quarter. This might prompt the group to gradually ease the cuts and hike output to meet its own demand projection.
For more energy news, click here.
