Oil Futures Tick Higher on Final Trading Day of 2023

Oil futures experienced a slight increase on the final trading day of 2023. However, this year has been marked as the first losing year since 2020 due to concerns about the demand outlook outweighing potential supply disruptions and efforts by OPEC and its allies to limit production.

Price action

• West Texas Intermediate crude for February delivery rose by 42 cents, or 0.6%, to $72.19 a barrel on the New York Mercantile Exchange.
• March Brent crude, the global benchmark, was down 56 cents, or 0.7%, at $77.71 a barrel on ICE Futures Europe.
• January gasoline rose 0.7% to $2.10 a gallon, while January heating oil edged up 0.1% to $2.558 a gallon.
• February natural gas fell 0.3% to $2.369 per million British thermal units.

Market drivers

In the fourth quarter of 2023, WTI saw a decline of over 20%, resulting in a 10.6% decrease for the entire year. Similarly, Brent experienced a significant drop of nearly 18% in the final three months of the year, leading to an annual loss of almost 9%. This marks the first losing year for both benchmarks since 2020.

The Changing Landscape of Crude Oil Markets

Crude oil has experienced a rollercoaster ride in recent months, with various factors impacting its price trajectory. Initially, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, implemented production cuts that helped drive up oil prices. Saudi Arabia voluntarily decreased its production by 1 million barrels per day starting in July, while Russia also curbed its exports. These measures were expected to create a significant supply deficit.

However, as we moved into late September, it became evident that the expected supply deficit had not materialized. This realization led to a peak in oil prices. Furthermore, the increased production from the United States, coupled with record output levels in 2023, and other non-OPEC producers, acted as a ceiling on crude oil prices.

The outbreak of the Israel-Hamas war in October initially sparked fears of potential supply disruptions from the Middle East. As a result, oil futures saw a jump. However, these fears proved to be short-lived, and crude oil failed to reach the highs seen in September. The geopolitical risk premium associated with such conflicts quickly eroded.

Although there was a brief rebound in December due to attacks by Iran-backed Houthi rebels on ships in the Red Sea, sustaining these gains has proved challenging. Investors have now shifted their focus towards the possibility of excessive supply and insufficient demand in the oil markets next year.

Overall, the landscape of crude oil markets is undergoing significant changes. While production cuts remain in effect until early 2024, the influence of factors such as increased production by non-OPEC countries and the failure of expected supply deficits has resulted in a more uncertain outlook for oil prices in the future.

Read: Why oil may not see a return to $100 a barrel in 2024

The Future of OPEC+ Production Strategy

Despite multiple efforts by OPEC+ to control production and maintain price stability, there are indications that a shift in strategy may be on the horizon. This change is prompted by the potential loss of market share to US producers, who have significantly ramped up their own oil production to achieve record levels.

While OPEC+ has successfully implemented production cuts in the past to stabilize prices, continued adherence to this approach may lead to a further erosion of their market share. As US producers continue to increase their output, OPEC+ faces the dilemma of either relinquishing more market dominance or reevaluating their current strategy.

The influence of US producers cannot be ignored. With their relentless pursuit of higher production levels, they present strong competition for OPEC+. Thus, maintaining the same strategy in the long run may prove detrimental to OPEC+’s position in the global oil market.

It is important for OPEC+ to carefully consider their next move. While they have achieved short-term price stabilization through production control measures, a rigid adherence to this approach may ultimately lead to a diminishing share of the market. To ensure their continued relevance and competitiveness, OPEC+ must devise a new strategy that strikes a balance between stabilizing prices and preserving their market share.

The future of OPEC+’s production strategy remains uncertain. As the global energy landscape continues to evolve with the rise of US producers, OPEC+ faces an ongoing challenge to adapt and navigate these changes effectively. Only time will tell what choices they make to maintain their position as a significant player in the world of oil production and pricing.