Oil prices are set to close out 2023 with an annual decline for the first time in three years, ending the year about 10% lower despite a turbulent 12 months that saw major geopolitical disruptions and efforts by big producers to support the market.
Oversupply Concerns Weigh On Prices
Prices rose briefly this week after Russia announced plans to cut oil output by 500,000 barrels per day next month after the West imposed price caps on its crude over the war in Ukraine. However, crude futures erased those gains on Friday amid concerns that supplies will overwhelm demand in early 2023. [1]
Brent crude futures were down 15 cents, or 0.2%, at $85.11 a barrel by 1123 GMT, taking this year’s losses to about 10%. U.S. West Texas Intermediate crude declined 16 cents, or 0.2%, to $80.15 after gaining 1.1% in the previous session. [2]
Demand Worries Outweigh Supply Cuts
Despite efforts by OPEC+ producers – which include members of the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia – to dial back oil output, demand worries stemming from China’s COVID-19 situation and worries about inflation-hit economies cast a pall as the year drew to a close. [3]
“The market is now in a rare situation where supply cuts are losing out to demand concerns,” said Craig Erlam of brokerage OANDA. [4]
Crude prices have been weighed down by concerns of a global economic slowdown, which would translate into weaker demand. Fresh COVID-19 restrictions in top crude importer China have added to those worries. [5]
Geopolitical Risks Continue To Loom Large
While headline prices are set to ease in 2023, geopolitical risks remain elevated and could continue to introduce volatility. [6]
Geopolitical tensions have made traders nervous through 2022, with Russia’s invasion of Ukraine in late February sending oil prices soaring. Worries over that conflict continue to simmer. [7]
Elsewhere, traders are keeping tabs on unrest in OPEC-member Libya, where oil facilities have been plagued by unplanned losses this month. [8]
Forecasts Point To Rangebound Prices in 2024
Oil prices look set to hold within a range in 2024, as slowing global demand balances out diminishing supply from Organization of the Petroleum Exporting Countries members. [9]
The outlook for prices is flat to rangebound at between $70 to $80 a barrel for international benchmark Brent futures. [10]
| Year | Average Brent Price | Average WTI Price |
|---|---|---|
| 2023 | $98 | $94 |
| 2024 (projected) | $75 | $73 |
Slow oil demand growth in 2024 could cap any upward movement in prices, even as global supplies remain tight amid years of underinvestment. [11]
U.S. shale remains disciplined following years of poor returns, keeping supply growth anemic. However, recession worries and China’s zero-COVID policy is dampening the demand outlook. [12]
Major Middle Eastern oil producers are gearing up for a global market share battle in 2024 if prices stay elevated, raising the prospects of a future crude price war. [13]
The combination of flat prices and disciplined supply suggest modest upside potential. While muted, stronger consumption as China eventually exits COVID restrictions could provide some price support later in 2024. [14]
Conclusion
In summary, oil prices look set to close out an eventful 2023 with their first annual decline in three years as demand concerns outweighed supply cuts from OPEC+. Forecasts point to a rangebound trading environment in 2024 as slowing demand growth counters tight supplies. While risks like geopolitics, China’s COVID situation, and a potential global recession cloud the outlook, prices may find some support if consumption rebounds later in the year. Investors and market participants should brace for continued volatility after 2022’s wild price swings.
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