What higher oil prices in 2024 could mean for the economy and politics
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The oil market has come to life, with prices finally delivering on our expectations for 2023. With Brent moving above US$90/bbl earlier this month, the highest for a decade outside the immediate aftermath of Russia’s invasion of Ukraine last year, I asked our oil experts, Ann-Louise Hittle and Alan Gelder, where the market goes from here.
Why did it take so long for prices to hit US$90?
We predicted Brent would be US$90/bbl by mid-year. But demand growth took longer to come through with the global economy weakening, and concerns about the pace of China’s recovery.
Despite adjusting our demand forecasts down, 2023 will be another year of strong post-Covid recovery. We now expect global demand to increase this year by 2.0 million b/d, only marginally below 2022 and the sixth-highest annual increase this century. China, despite its perceived economic travails, will contribute half of the growth as the economy bounces back from the severe pandemic lockdowns of last year. Global demand is currently hitting a new all-time high of more than 102 million b/d.
What was the trigger for prices to rise above US$90?
It’s been more about supply than demand – notably Saudi Arabia’s and Russia’s announcement on 5 September to extend voluntary supply cuts through to the end of the year. With non-OPEC production increasing more than demand in 2023, OPEC+ production cuts have been instrumental in bringing the market into balance. The extensions mean an even bigger drawdown of crude inventory in Q4 than we had forecast, likely leading to a tighter market in 2024.
Will non-OPEC production continue to grow?
Yes, though at a slower rate. We forecast 1 million b/d for each of 2024 and 2025, half of this year’s growth. The main contributors are the US, Canada, Brazil and Guyana, with most coming from US NGLs. But US tight oil growth is slowing sharply as operators exercise strict capital discipline in the face of soaring cost inflation. After increasing by 0.8 million b/d in 2023, we expect US Lower 48 growth of just 0.2 million b/d in 2024.
When will OPEC+ reverse its production cuts?
The fundamentals suggest there is some scope for OPEC+ to increase production over the next two years. Non-OPEC producers are poised to capture just over half of the 3.4 million b/d of contestable demand we forecast for 2024 and 2025 combined. That leaves room for the key OPEC producers bearing the bulk of supply cuts to lift output from current levels. Much, though, depends on demand growth and whether the global economy begins to emerge from the slowdown. Iran’s aspirations to lift exports is a wild card.
Can oil prices move higher?
Certainly, for the next few months with crude and product markets both running tight. We forecast Brent will average US$90/bbl in 2024, 7% higher than this year. OPEC+ has every reason to continue to support the market, with strong cash flow generation its reward for balancing the fundamentals. But it won’t all be plain sailing. Deft management – and time – will be required to return 2.6 million b/d of production cuts and get supply back to the OPEC+ November 2022 target levels without disturbing the present equilibrium.
What are the economic and political implications of today’s price?
First, US$90/bbl is not that high – in real terms, it’s only 60% of the 2011 average, Brent’s all-time annual peak. Second, the global economy is much less oil-intensive and so less sensitive to crude price moves than it once was. We reckon the 7% average annual price increase we forecast for 2024 will have only a marginally negative effect on global GDP growth. That said, higher oil prices will fuel inflation further, potentially delaying interest rate cuts.
There are, though, winners and losers from higher prices. Producing countries are doing better, net oil-importing countries, worse. For the US – both a producer and a consumer – it works both ways.
But the economic impact of higher oil prices is felt most immediately at the gasoline pump, hitting voters’ pockets. That opens up the possibility of a political twist. How much or how little crude OPEC+ chooses to feed back into the market during the course of the US presidential campaign next year could influence voters’ intentions.
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