Market in 2023; China's economy unexpectedly sluggish

We looked back high-profile factors and events in the crude oil market in 2023. What the market would be like in 2024. We hear forecasts from experts in a various field including analysts of financial institutes and think tanks and independent analysts.

In 2023, "The crude oil market was hovering high and moved little," said Satoru Yoshida, a commodity analyst with Rakuten Securities. He mentioned, "Upward momentum always existed to some extent. Also, downward pressure existed to cap the market though it did not make the market plunge." Despite bearish factors such as failures of several financial institutes in the US and Europe, economic slowdown after the Zero Covid policy in China and the debt ceiling problems in the US, "Prices were maintained at certain levels due to factors including tight supply by oil producing countries."

In fact, OPEC and non-OPEC, or OPEC plus, maintained production cut policy. In addition, Saudi Arabia and Russia are implementing export restrictions of 1.00 mil bbl per day (b/d) and of 500,000 b/d, respectively. Takayuki Nogami, Chief Economist at the Japan Oil, Gas and Metals National Corporation (JOGMEC) mentioned that the declining phase was not persistent that much, adding that the market had been overall firm.

Some pointed out that the market lacked directions in 2023. Tsuyoshi Ueno, senior economist with NLI Research Institute, said, "Various speculations were seen with many factors in 2023."

Tomomichi Akuta, Senior Economist at Mitsubishi UFJ Research and Consulting, found that the market was affected by "geopolitical risks" including the outbreak of a war between Israel and Islamic militant movement "Hamas", and a war between Russia and Ukraine. The crude oil market lacked directions along with global economy.

On the other hand, "The market was affected by short-period speculation money rather than supply/demand of crude oil," said Tsutomu Kosuge, the president of Marketedge. He said, "The market was often swayed by trading by funds and prices were overshot a bit. Movements of speculation money is weighed more than supply/demand fundamentals compared with before."

Naohiro Niimura, partner at Market Risk Advisory, forecast a decline in crude oil prices caused by an economic slowdown in the US from the beginning. But he said, "The market unexpectedly strengthened occasionally due to an early recovery of US economy, production cuts by OPEC Plus and tensions in the Middel East."

Many analysts pointed out poor Chinse economy as an unexpected factor in 2023. The Chinese government lifted "Zero-Covid policy" restrictions in early 2023. Market players forecast that Chinese economy would recover and energy demand would be boosted. But several economic indices showed a slow recovery of economy. Mr Kosuge perceived that bullish factors were observed such as an increase in import volumes of crude oil. However, he pointed out that the market was affected by macro economy's indices of China, adding that supply/demand situation was assessed harshly throughout the year.

Another unexpected factor was the fact that OPEC Plus members were not moving cohesively, which was turned out at the end of November. Some analysts reckoned that this would be a major concern for the crude oil market in 2024. Meanwhile, OPEC Plus jointly agreed to maintain production cut volumes at the Joint Ministerial Monitoring Committee (JMMC) in June. Mr Akuta said, "It was impossible to expect persistent movements on production cuts by oil producing countries after summer."

Mr Yoshida pointed out that the service inflation index hovered high in the US. Because of this, atmosphere of interest hike by FRB did not retreat as much as expected. As a result, "Bullish scenarios did not appear that much," said Mr Yoshida.

With regard to risk factors for the weak crude oil market, several analysts pointed out decreasing energy demand in line with sluggish economy in the US and China, and conflicts among OPEC Plus members. However, several analysts said, "An expected increase in energy demand could be a bullish factor for the market after US and Chinese economy hit the bottom." In 2024, determining risks for a decline in the market and at which points the market would reverse would be keys.

As a bullish factor, supply concerns arising from geopolitical risks, a rise in demand for petrochemical products due to an expected drop in interest rates by FRB, and the attractive crude oil futures market amid the low dollar are mentioned.

Several analysts pointed out that the crude oil market would be firm in 2024 too since OPEC Plus would maintain production cuts up until the end of 2024. On the other hand, perceptions are persistently seen that there are no leading players to boost energy demand. Mr Nogami pays attention to a decease and an increase in demand, and shale oil production volumes in the US in the wake of movements of crude oil prices. While an excessive rise in crude oil prices curbs demand, it would raise shale oil production volumes in the US, according to Mr Nogami.

Regarding movements of oil producing countries in 2024, we heard the following forecasts. Most analysts anticipate that OPEC Plus would continue or strengthen production cuts.

【Mr Yoshida】
OPEC Plus might intensify the ongoing production cuts to support crude oil prices. It might take the following three measures.

1.Extension of production cut perio
2.Increase in production cut volume
3.Prompting more countries to join the production cuts

At present, the third one seems to be the most feasible because OPEC are approaching Guyana and Brazil, South America oil producing countries, according to a press release of OPEC Plus. Based on forecasts by the International Monetary Fund (IMF), crude oil prices should be at around $70 for oil producing countries participating in the production cuts to balance their fiscal revenue and expenditure. If the market is below the $70 mark, the producers would suggest further production cuts and try to stop a fall in the market.

【Mr Nogami】
Considering interests among OPEC Plus members, it is more beneficial to decrease production all together. Thus, the production volume target might be officially reduced eventually.

【Mr Ueno】
With no players leading to boost energy demand, OEPC Plus might have no choice but to continue production cuts for a long time. But since some oil producing countries are already inactive in production cuts, the members such as Saudi Arabia, which are voluntarily lowering production, might repeatedly implement or extend production cuts.

【Mr Niimura】
OPEC Plus would likely continue production cuts to maintain prices but has risks that the members cannot move together when the market is falling.

【Mr Akuta】
Saudi Arabia might intensify production cuts but would find it even more difficult to get members to cooperate. As crude oil prices would lose, oil production volumes would hit the ceiling in the US.

【Mr Kosuge】
If prices rapidly rise, the US, Canada and Brazil would accelerate a production increase and OPEC Plus would have to take more strict measures. Meanwhile, as long as so-called "OPEC Put" is functioning, the market would not plummet. However, dissatisfaction among African oil producing countries became visible toward the end of 2023. If OPEC Plus does not move together, concerns over a decline in prices would grow, which, however, is less likely.

As for production in the US, opinions differed. Mr Nogami forecast that the US would produce more volumes than market expectations, which would curb a rise in the market. Meanwhile, Mr Niimura pointed out that the US would not raise production volumes as much as expected due to tightening of monetary policy.

Further, regarding tensions between Venezuela and Guyana, Mr Kosuge found it difficult to forecast but said, "If the tensions develop to military conflicts, supply from Venezuela would be especially affected for a long time."

We heard about what analysts were paying attention to besides the crude oil market.

-Europe natural gas market

【Mr Nogami】
If natural gas prices advance sharply, intake of Russian gas by EU and other countries might be reduced, though the possibility is low.

【Mr Niimura】
As Ra Nina might occur in 2024 onwards, procurement concerns over fuels for power generation including gas and coal might grow in summer toward winter.

【Mr Akuta】
The gas market would remain unstable factors for the crude oil market.

-US equity prices, interest rate, dollar index

【Mr Kosube】
If the dollar depreciates further, dollar-based crude oil prices would not decline that much.

【Mr Akuga】
If interest rate hike slows down, more cash would flow into the equity market and a recovery of economy is more expected, which would result in high crude oil prices. At the same time, commodities traded in the dollar would seem to be relatively low-priced due to weak dollar indices. This might exert upward pressure on the crude oil market.

Further, all of the analysts pointed out that the US presidential election in November could have impacts on the crude oil market in 2024. A winner of the election is expected to have keys on energy policy in the US.

Republican presidential nomination race is ongoing and former President Donald Trump is a likely candidate. If Trump is elected, "US might withdraw from the Paris Agreement and accelerate production of fossil fuels. Along with an expected rise in production of fossil fuels, prices for fossil fuels might weaken."

Mr Ueno also said, "The US government might abolish its de-carbonization policy and increase domestic crude oil production. The US might put pressure to stop production cuts by OPEC and focus on a reduction in crude oil prices."

Meanwhile, Mr Nogami said, "Forecasts that crude oil production in Iran might be reduced would emerge although Iran is increasing production at present. Moreover, the US would be expected to implement large scale economic stimulus package. This might exert upward pressure on the crude oil market."