Subdued Oil Demand Growth
While gold grabbed all the headlines in 2024, crude oil has slipped under the radar with market dynamics transformed. The commodity opened at $71.65 per barrel before summiting the highest price of $87.63 per barrel in April. The markets slumped thereafter dropping to $65.27 per barrel in September. At the time of this article, the price is trading along the lower levels at $70 per barrel.
As the year is coming to a close, the price of crude oil remains under close observation due to many factors including supply-side limitations, geopolitical tensions and evolving global demand patterns. Numerous drivers will likely drive the price and availability of crude oil. Proper research and comprehension of the dynamics is vital for traders, policymakers and organisations alike.
Production Cuts and OPEC
A series of production cuts from OPEC+ nations, i.e., a group of oil-producing nations including Saudi Arabia and Russia, is one of the most important factors that influenced the prices of oil this year. Due to the volatile nature of the global market, countries have strategically reduced output to manage the prices. Saudi Arabia has extended voluntary production cuts numerous times to sustain the prices above a threshold level.
Before the USA emerged as a major global supplier of oil, the policy of production cuts from OPEC+ inevitably hiked prices. However, in recent seasons, production cuts are seen to have been less effective. The consequence of current cuts on crude prices has been mixed signalling concerns about the negative effects on certain economies within OPEC+ countries. Analysts continue to closely monitor any announcements of further cuts or changes in production plans as even a tiny shift in momentum can have immediate global effects on the prices of oil.
Geopolitical Risks
Geopolitical disputes have a long history of influencing the energy markets and 2024 is no exception. Escalating instability in several parts of the world could potentially disrupt the supply of oil in the global markets. Any diplomatic or military clash could ignite volatility in the energy markets especially if it involves an oil-producing nation. One country in the Middle East that traders and participants are watching is Iran. However, the key in the whole narrative is the actual disruption in oil supply and not just the implication of potential disruption as those moves tends to be short-lived and correct themselves quickly.
Political disputes in oil-producing nations including Libya, Venezuela and Nigeria could further accelerate supply disruptions. Although these countries may not individually have the same production capacity as the larger production powerhouses in OPEC, sudden disturbances could still impact global supply chains and prices.
Shale Oil Supply
Due to significant Shale oil reserves and the fracking industry, the US remains the largest oil producer in the world. The US Shale production has offset some of the global supply cuts initiated by OPEC+ in the recent years. However, the question remains about how much more production capacity is available in the short term.
Companies engaged in fracking activities have been cautious in increasing production. After years of aggressive drilling, numerous organisations focus on profitability than growth thereby contributing to slower output increases even when there is a price hike. Regulations enveloping the environment and concerns about the sustainability of production have also influenced slower growth in the industry.
Oil Demand from China
The turn of the 2020s improved the Chinese economic outlook and the demand for energy products. However, the demand for fossil fuels has been on decline. Last month, the People’s Bank of China announced sweeping stimulus measures which could affect oil demand positively. Monitoring the stimulus is essential as the Chinese market inevitably impacts the price of crude oil.
US Economy
The central bank of the USA, the Federal Reserve, cut its short-term interest rates by 50 basis points indicating reservations about future growth. However, the Fed has firmly rejected the notion that the US economy is in dire straits. If recession does occur, some analysts believe that the US demand for crude oil will likely plunge. In terms of numbers and figures, the US is the leading consumer of crude oil.
Transitioning Global Energy Trends
The long-term shift towards renewable energy and lower-carbon energy sources will inadvertently shape oil markets. This despite short-term factors like production cuts and geopolitical disputes continuing to dominate headlines. Many economies, particularly European nations, are fast-tracking their shift from fossil fuels to reduce dependence on oil and gas as part of climate change mitigation plans. This planned transition leads to increased investments in renewable energy and electric vehicles (EVs) reducing oil demand in the near future. The International Energy Agency and other forecasters have predicted that peak oil demand has arrived sooner than expected due to the rapid climb of renewable energy sources and demand for EVs.
