Oil prices are on pace to close out the year about 10% lower as bearish sentiment has overtaken the market due to worries that the market is oversupplied from record production outside OPEC.
The West Texas Intermediate contract for February gained 10 cents, or 0.14%, to trade at $71.87 to barrel on Friday. The Brent contract for March rose 12 cents, or 0.16%, to trade at $77.27.
But U.S. crude and the global benchmark were headed for the first annual decline since 2020 despite ongoing geopolitical risk in the Middle East due to the devastating war in Gaza.
Oil prices rose nearly 3% on Tuesday on worries that militant attacks on shipping in the Red Sea would disrupt global trade and crude supplies. However, WTI is down 10.45% for the year, and Brent has lost 9.9%.
While fears of escalation in the Middle East have triggered brief spikes in crude prices, traders are primarily focused on the supply and demand balance.
Record U.S. production
The U.S. is producing crude at a record pace, pumping an estimated 13.3 million barrels per day last week. Production is also at a record in Brazil and Guyana. The historic production outside OPEC has collided with an economic slowdown in major economies, above all China.
OPEC and its allies, meanwhile, have promised to cut production by 2.2 million barrels per day in the first quarter of 2024, but traders apparently have little confidence that the bloc’s policy will bring the market into balance.
Oil production outside OPEC, above all in the U.S., is expected to more than cover demand growth in 2024, according to the International Energy Agency. Global oil demand growth is expect to fall by half to 1.1 mbd next year, while production outside OPEC is expected grow by 1.2 mbd.
Profound impact on oil
The shift in crude supply from the Middle East to the U.S. and other Atlantic countries is “profoundly impacting the global oil trade,” the IEA said in its December outlook.
The U.S. was responsible for two-thirds of the growth in supply outside OPEC this year. This is challenging efforts by producers in the Middle East to defend their market share and lift oil prices, according to the IEA.
OPEC seems to have little room to maneuver, with production cuts falling on deaf ears. Brazil has agreed to ally itself with the bloc, but it is not clear what that means for markets.
Occidental CEO Vicki Hollub told CNBC in December that U.S. production this year has reached levels that surprised even her. She had a message of caution for the industry.
“It would be prudent of U.S. producers to be careful in terms of putting too much supply in the market,” Hollub said.
The Occidental CEO and Morgan Stanley do see U.S. crude prices bouncing back next year with a barrel of WTI averaging about $80. Wells Fargo has a lower forecast with WTI averaging $71.50 a barrel next year.
Mideast escalation threat
While the market is focused on the supply and demand picture, Helima Croft of RBC Capital Markets told investors to watch developments in the Middle East closely.
“Anything that brings more direct confrontation with Iran and the United States is what you have to watch,” Croft said Friday on CNBC’s “Squawk Box.”
Three U.S. troops were injured Monday in a drone attack in Iraq carried out by Iran-backed militants. President Joe Biden then ordered retaliatory strikes on militia sites. And attacks by Iran-backed militants in Yemen on vessels in the Red Sea caused global shipping companies to reroute some traffic from the Suez Canal around the Cape of Good Hope in Africa.
The situation is also escalating on the Israel’s northern border with Lebanon. Israel Defense Minister Yoav Gallant said Tuesday that his country is facing a “multiarena war” from seven areas: Gaza, the West Bank, Iran, Iraq, Lebanon, Syria and Yemen.
“If you look at the situation in the Middle East, I think it is far too soon to write off the risks there,” RBC’s Croft said.