Higher crude supply could drag oil prices lower this year, analysts say

Crude recorded its biggest annual loss since 2020 last year following a bigger-than-expected surge in US oil production

Analysts forecast a more bearish outlook for oil prices this year compared with 2023. Getty Images

Oil prices may be lower this year compared with 2023 on greater crude supply from some producers and weaker demand growth in China, the world’s second-largest economy.

Analysts said increasing production in countries such as the US, Iran, and Venezuela, as well as slower economic growth in China, has resulted in a more “bearish” outlook for oil markets.

The crude price posted its biggest annual loss since 2020 last year as a bigger-than-expected surge in US production offset the impact of Opec+ supply cuts and geopolitical concerns such as in the Red Sea, a critical trading route for crude oil and liquefied natural gas (LNG).

Brent, the benchmark for two thirds of the world’s oil, ended 2023 10 per cent lower at about $77 a barrel. The benchmark surged to nearly $140 a barrel the year before as Russia’s invasion of Ukraine triggered concerns about the availability of oil.

Prices were up on Thursday morning. Brent was up 0.55 per cent at $78.31 a barrel at 10.42am UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.84 per cent at $73.17 a barrel.

“With a couple of short-term exceptions, there's more oil available from more sources than has been the case for a very long time,” Mike Muller, head of Asia trading at Vitol, said during the Gulf Intelligence Energy Outlook Forum last week.

“Sanctioned sources of crude, namely Iran and Russia, are finding their way to market in decent quantities also still,” Mr Muller said.

Despite US-imposed economic sanctions, Tehran increased its production to about 3.1 million barrels per day in November, up from 2.55 million bpd in 2022, Opec data showed.

In 2023, Russian oil production is forecast to fall 2 per cent to 524 million tonnes or 10.57 million bpd, state news agency Tass reported, quoting the country’s energy minister.

Russia recorded an output of 535 million tonnes or 10.73 million bpd in 2022.

In October, the US eased sanctions on Opec member Venezuela to address the supply concerns caused by the Israel-Gaza war.

The South American country aims to increase its production to one million bpd from about 850,000 bpd. It had an output of around three million bpd before the sanctions were imposed.

Analysts have cited an unexpected surge in US output as the main reason for the drop in oil prices in the fourth quarter, which cushioned the impact of the Israel-Gaza war and its escalation into the Red Sea.

Production by American oil and gas companies rose by about a million-bpd last year, higher than analysts’ estimates of an increase of 600,000 bpd.

“If it again turns out to be a million [bpd] for whatever reason [this year], I think that's when the market balances go out of whack a little bit,” said Amrita Sen, founder, and director of research at Energy Aspects.

“But, if growth is actually slower because … the base of production is a lot higher as well … that will provide some tailwinds for prices to go up in the summer,” she said.

An oil storage tank and crude oil pipeline equipment at the Strategic Petroleum Reserve in Freeport, Texas, US. Reuters

The US Energy Information Administration expects US crude output to reach 13.44 million bpd this year, compared with its 2023 estimate of 13.21 million bpd.

The EIA, the statistical arm of the US Department of Energy, has forecast Brent crude prices of $82 per barrel in 2024 and $79 in 2025, close to last year’s average of $82.

“Our forecast for relatively little price change is based on expectations that global supply and demand of petroleum liquids will be relatively balanced,” the EIA said in its Short-Term Energy Outlook last week.

“We generally expect that the Brent crude oil price is more likely to decline than rise because we expect global oil production is more likely to exceed our forecast than fall short of our forecast,” it added.

In December, Goldman Sachs lowered its price expectation for Brent this year by $10 a barrel to between $70 and $90 because of strong US production.

However, UBS has said that supply management by Opec+ would help prices to recover in 2024.

The Swiss lender expects the price of Brent to recover to $80 to $90 a barrel. The benchmark settled at $78.29 a barrel last Friday.

Last month, Opec+ announced voluntary production cuts of 2.2 million bpd for the first quarter of this year, taking its total committed reductions to 5.86 million bpd.

“We'll kind of be around that $80 mark. Given the economic backdrop, I think Opec will take that,” said Ms Sen.

She also said that the negative sentiment in the market around China’s oil demand outlook had been exaggerated.

Chinese economic growth was expected to increase following the end of coronavirus restrictions in late 2022.

However, the country has been grappling with a slowdown in its property sector, weak consumer spending and high debt levels.

Despite signs of economic weakness, China’s crude imports were at a record high last year, gaining nearly 11 per cent year-over-year to reach 563.99 million metric tonnes, or 11.28 million bpd, according to official data.

“While you have an economy that everyone says is in the doldrums, the official growth numbers is still around the 4.5/5 per cent number,” Mr Muller said.

“The short term nowcasting is showing a pretty resilient set of demand numbers coming from something that is not construction and maybe not even manufacturing, but China is on the move,” he said.

Red Sea impact

Growing tension in the Red Sea, which handles 12 per cent of the world's trade, has raised concerns about potential disruption to crude oil deliveries.

However, the impact on prices has been limited as there have been no oil supply losses so far.

“These are not black swan events,” said Mr Muller, referring to events which are unexpected, rare and have significant impact.

“They're very much newsworthy, they're very important and some of them carry great dangers, but things like the joint military action to prevent missiles from Yemen hitting merchant fleet ships … have not served to materially disrupt oil prices,” he added.

Instead, the oil executive said, the Covid-19 pandemic and Russia's invasion of Ukraine in 2022 had been black swan events for energy markets.

The 2020 pandemic wiped out fuel demand overnight, leading to negative US crude prices for the first time in history.

The involvement of Russia, one of the world's largest energy exporters, in a military offensive sent shock waves across commodity markets, including crude, natural gas and grains.