Global oil markets are facing a supply-driven shift as increased crude production from non-OPEC+ nations, notably the United States, threatens to outpace slower-paced global demand growth. Despite OPEC+’s pledge for deeper output cuts, traders remain skeptical about their effectiveness in eliminating the surplus fully. This has led to the first annual decline in crude oil prices since 2020, defying expectations of a post-pandemic recovery.
Speculators, tightening their grip on the market, have fueled price swings detached from fundamentals. Various indicators suggest weakness, including a bearish contango structure in the Brent futures curve and the most bearish sentiment among speculators in over a decade. The market appears to be in a ‘show-me mode,’ demanding substantial stock draws and stronger fundamentals before renewed buying interest.
Challenges persist for OPEC+, particularly in navigating the sensitivity of US producers to oil prices. Record US crude production and expectations of a new all-time high in 2024, along with contributions from Brazil and Guyana, further complicate the supply-demand balance. Geopolitical risks and uncertainties surrounding OPEC+’s management of the surplus add complexity to the market outlook.
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Against that backdrop, here are some morning market thoughts from Flashpoint’s Darius Lechtenberger:
“WTI crude oil and refined product prices are trending upward in early trading. Optimism regarding the Federal Reserve cutting interest rates in 2024 and continued geopolitical strife in the Middle East are supporting crude oil prices. China could also play a major role in providing price support for crude oil in 2024. Reuters reports that China’s 2024 crude oil import quotas are 60% more than last year! However, expectations of ample oil supply in the first half of 2024 are keeping a lid on crude oil prices ahead of OPEC+ plans to hold a Joint Ministerial Monitoring Committee (JMMC) meeting in early February. With Angola deciding to leave the cartel and with the current weak crude oil market fundamentals, is it possible that OPEC+ is growing uneasy over losing market share while maintaining voluntary production cuts of 2.2 million bpd for 1Q24? Crude oil drawdowns are expected to continue as the new year begins while gasoline demand looks to continue to be solid, even though reporting agencies will probably continue to paint a picture of withering demand. It is also expected that U.S. crude oil’s record-breaking run of production could start to decline a bit. As expected, propane prices moderated yesterday after last week’s upward price surge.”
