HOUSTON — The oil market of the past 12 months is not one that analysts at the CERAWeek conference of 2023 would have predicted.
That it has been a surprise to numerous experts and analysts was a recurring theme at a key session at the giant CERAWeek 2024 conference. The panel was titled “Oil Markets in 2024-2025: Abundance or Scarcity?”
Panelists did not definitively answer the question. However, with a prevailing price of more than $80 a barrel for Brent crude, the world’s benchmark, the consensus seemed to be that there was enough scarcity or threat of it to keep the price relatively high but enough abundance not to worry about fears of a spike in the next year.
Oil markets at the time of CERAWeek 2023 meeting led to several forecasts that didn’t pan out, according to Helen Currie, chief economist at oil giant ConocoPhillips (NYSE: COP). A prevalent view a year ago was for a year marked by weaker demand created by poor economic conditions.
“At this time last year, there were a lot of consensus views that the U.S. was going to have a recession and there’s going to be a large global slowdown,” Currie said. “That created a lot of negativity for oil markets and other commodity markets.”
But that didn’t happen, and oil demand has been setting all-time records.
Also unforeseen were two major conflicts in the Middle East: one in Gaza being waged against Hamas by Israel and the second, related conflict marked by drone and missile attacks on international shipping in the Red Sea by Houthi militants in Yemen.
And yet the impact on price from all that has been minimal. While demand has surprised to the upside, according to Ben Luckock, the global head of oil at trading firm Trafigura, so has supply.
No backing down in U.S. oil production
The list of countries that contributed to that unexpected “beat” on supply forecasts is headed by the U.S. The U.S. wrapped up 2022 with production in December of that year of 12.1 million barrels a day. By December 2023, U.S. crude output was 13.3 million barrels a day, according to the Energy Information Administration.
Currie said the ConocoPhillips forecast is for U.S. production to continue to grow, “but at a slower rate.” She said her company expects the growth rate in 2024 to be about half that of 2023.
For anybody anticipating a significant slowdown in U.S. production, Currie had a message: “The U.S. is going to continue to be a very large and reliable producer of oil for a long time.”
Luckock said after listening to various presentations at CERAWeek by the CEOs of major U.S. producers, “I suspect U.S. production is going to continue to grow nicely.”
“You leave the presentations thinking that the ones who bought assets are going to produce with them and the ones that are already there are finding technologies to drive efficiency,” he said.
In particular, the application of AI, particularly generative AI, is a “driving force” in maintaining and growing U.S production, Luckock said. (AI has been a key theme at CERAWeek and the general thrust is that it can process far more information than current technology, helping to reach better decisions and strategies).
Frederic Lasserre, the global head of research and analysis at Gunvor Group, said the potential gains in output as a result of AI are “probably just the beginning of a new wave. I think even the producers themselves tend to underestimate what AI can deliver in terms of productivity.”
This year is one in which an enormous percentage of the world’s population is going to elect their countries’ new leaders or reelect existing ones, none bigger than in the U.S. Luckock downplayed the impact on the U.S. oil industry that would occur regardless of who wins.
“I think we’ve been sort of trained over many years to feel that one party is better for the industry and one party is worse,” he said. “But are we on edge about what happens? Not particularly. We’ll take what comes.”
Whoever wins the election will likely be dealing with an oil sector marked by stability, Luckock said, using a word that came up often during the discussion.
Oil price has started to move higher, fueled by Russia
Recent increases in the price of oil did draw attention, however. Lasserre said recent attacks by Ukraine on Russian refining assets, which are seen as a factor in price increases, particularly for refined products, have probably taken about 1 million barrels a day of refining capacity off the market.
As measured by the price of ultra low sulfur diesel on the CME commodity exchange, the recent bullish oil market has taken that number up to a settlement Monday of $2.7882 a gallon from a recent low of $2.6065 on March 5.
That sort of development generally leads to an increase in exports of crude that can’t find a home in Russia’s refineries, but “tightening of sanctions by the U.S. and EU is having some impact” on the ability of Russia to turn to crude exports to offset the loss of refining capacity.
That is a short-term issue. In the longer term are the various sanctions packages against Russia that are restricting exports of exploration and production technology to that country.
Russian production in February was 9.43 million barrels a day, according to S&P Global Commodity Insights, which produces the CERAWeek conference (NYSE: SPGI). Six months earlier, it was largely the same.
Luckock questioned whether that could be maintained because of the sanctions. “I think over time, it’s hard to see how the Western squeeze on technology doesn’t impact Russian production,” he said.
Another area of short-term risk: the rerouting of trade flows to avoid the Red Sea and the Houthi attacks. Lasserre said it was “quite amazing” that oil markets have not reacted more strongly to the disruptions in the oil supply chain created by the diversions. Implied volatility from the oil options market is “too low, which is surprising based on the context where anything could happen overnight.”
Currie said the shipping sector “has adjusted and started to reoptimize ship movements.” But echoing the recent monthly report of the International Energy Agency, Currie said the diversions are adding to oil demand as well as the supply chains for all sorts of goods. “It’s creating kind of a knock-on effect for other industries that could ultimately kind of trickle into a little bit of inflationary impact,” she said.
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