The oil market began 2024 as a whole without much change - with prices at about $ 80 per barrel of Brent.
"The concerns are still the same as in December: potentially weak demand in the first half of 2024, especially in Asia, outstripping production growth in the United States, doubts about the sustainability of cuts within OPEC+, the preservation of a general, albeit unstable, trend towards growth of commercial reserves," said Alexey Belogoryev, Director of research of the Institute of Energy and Finance.
Nevertheless, in the first week of the year, oil prices managed to show positive dynamics. Mainly, the shutdown of oil production at Libya's largest Al-Sharara field and market concerns about supply disruptions from the Middle East due to the war between Israel and Hamas had a positive impact on quotations. However, in the future, this price enthusiasm has come to naught due to the weakening of worries that tensions in the Red Sea will lead to disruptions in global supplies.
"The range of futures prices for the first six trading days of this year was in the range of 74.79-79.41 dollars per barrel (the standard deviation was 1.5% with a swing range of no more than 6.2%). At the same time, the market reacted quite logically to the news coming out - first of all, to the aggravation of the military and political situation in the Red Sea area (when the United States destroyed three Houthi boats, and Iran sent its destroyer to this region) and the release of an OPEC press release stating that all OPEC+ countries are committed to the Declaration of cooperation and united in desire to ensure stability in the oil market. From our point of view, the release of data on commercial stocks in the United States did not have a significant impact on market dynamics," Alexander Arutyunyan, Chief economist at RUSS-INVEST IC, commented on the events of the first week of 2024.
As for the beginning of the second week of this year, the oil market began to count losses. The fact is that on Sunday, January 7, Saudi Arabia decided to sharply lower prices for its exports to Asia and partly to Europe due to sluggish demand.
"Perhaps the most noticeable (and somewhat unexpected) market news was Saudi Aramco's decision to reduce selling prices for Arab Light crude oil for all regions of the world (including Asian customers - by $ 2 per barrel) from the beginning of February," Arutyunyan stressed.
It is worth noting that prices for Asian exports have fallen to their lowest level in 27 months. As a result, Brent futures collapsed by more than 3%, which negated all the gains made in the first week of 2024. Oil prices have returned to a 6-month low. Recall that over the past week, the price of Brent crude oil on the futures market increased from $ 77.08 per barrel to 79.4.
At the moment, the quotes are rising again. A barrel of Brent adds 1.9% to $77.72. However, the tension in the market is not subsiding, as investors are waiting for the release of key economic indicators, such as inflation data in the United States and China later this week.
"The situation in the oil market continues to be difficult. Despite the external risks to the market, which, it would seem, should have a positive effect on the price, economic factors with oversupply still outweigh," said Nikolay Dudchenko, analyst at Finam Financial Group.
The price war
It seems that, indeed, the oil market cannot avoid a new sell-off. As Bloomberg noted the day before, Riyadh's decision will take effect in February. Oil consumption usually decreases in February and March, when refiners close some plants for scheduled maintenance. At the same time, the high level of supply in the world, including from the United States, increases the risk of an oversupply.
Recall that in 2023, key members of the OPEC+ alliance reduced production to stabilize commodity prices. However, this year the Saudis apparently decided to change tactics, since the growth of exports from the United States, Venezuela and Iran in the spring is able to bring down the cost of "black gold" to minimum levels. And this is despite the fact that concerns are growing about a slowdown in oil demand, especially among large Asian consumers, including China.
In such circumstances, Saudi Arabia's decision cannot be called unexpected. Rather, it looks natural, Belogoryev believes. He recalled that Saudi Aramco monthly adjusts the official sales prices (OSP) of its oil grades for the next calendar month for different regions, this is a common practice for the company.
"In the second half of 2023, up to November, these prices were growing briskly. The February price for Asian countries has been set at the lowest level in the last 27 months (since November 2021), but this only means that the Saudis raised prices too high in 2023 and their oil became less competitive because of this. It is worth explaining that the OSP price is not fixed, but floating to the average of two reference quotes - Oman and Dubai (Platts Dubai/DME Oman), and is traditionally traded at a premium to them. In November-December 2023, the premium for the key Arab Light grade was $ 4 per barrel, in January it was reduced to $ 3.5, for February deliveries it was reduced to $ 1.5. But it's still a premium, not a discount. And its change is not directly related to the dynamics of prices for reference varieties. In fact, Saudi Aramco, almost a whole quarter late, brought its marketing policy in line with the policy of its main competitors," the expert explained.
It should also be taken into account that OPEC+ members, which are the Saudis, are finding it increasingly difficult to reduce production. Already, the last few rounds of cuts have been voluntary. Only individual members of the alliance went to this. Secondly, it is not the first time for Saudi Arabia to dramatically change the rules of the game. The last time the "sale attraction" was organized by the Saudis in 2022 against the background of an increase in oil imports from Russia to China. Then the prices for Arab Heavy and Arab Medium grades were set at the largest discount to Arab Light since 2014.
However, if you go deeper into history, you can recall the events of the 80s of the last century, when the oil market was in a situation strongly reminiscent of today: the "oil powers" tried to keep prices high by reducing oil production, but they did not succeed well. Riyadh suffered especially badly from this - production volumes in the kingdom decreased from 10.3 million tons of barrels per day in 1981 to 3.6 million in 1985. And then the Minister of the Oil Industry of Saudi Arabia, Ahmed Zaki Yamani, makes a statement that subsequently turned the whole "oil world" upside down: the country's authorities no longer intend to fight to keep oil prices down, and Saudi oil companies will begin to increase production of "black gold".
As a result, in a matter of months, the price of oil collapsed from $31 to $ 10 per barrel. The extraction required high costs and became unprofitable. For the USSR, this generally resulted in a disaster. If in 1984 the country borrowed 15 billion dollars on the foreign market, then in 1986 it was twice as much. The sale of the gold reserve did not help either. The result of the dumping is now known to everyone. Some experts are sure that there was collusion between the Saudis and the Americans in this case. So, apparently, they wanted to force the Soviet troops to leave Afghanistan.
If we go back to the present, then Saudi Arabia may now be playing against the United States, which has also recently become a serious competitor for the Arabs. As explained by Russian billionaire Oleg Deripaska, the fall in oil prices, which this year may amount to another 20%, will hit military spending by Western powers. "Now the militant obscurantists in the West will have to work hard to persuade international investors to finance not only insane military spending, but also to lend about $4 trillion to the United States, about 1.2 trillion euros to Europe, and about 350 billion pounds to England, which is on the verge of default," the metallurgical magnate wrote in Telegram.
Arutyunyan also adheres to the idea that the Saudis are playing against the Americans. He recalled that at the end of last year he repeatedly noted that, given the constantly increasing oil production in the United States, OPEC+ had only two options left: either a more drastic reduction in production (which caused resistance within the cartel and Angola's withdrawal from OPEC), or the beginning of a price war.
"It is quite possible that this price reduction, the strongest in more than two years, represents a debut on the part of Saudi Arabia, which may well follow this path to put American shale companies on the brink of unprofitability and force them to reduce production by closing low-margin wells (this process is already underway in the United States). But there is also an alternative explanation - it is possible that in this way Saudi Arabia is simply trying to discipline OPEC+ members," the expert added.
At the same time, he does not exclude the possibility that, strangely enough, the United States, and not the Saudis and their OPEC+ allies, will win in this battle.
"Unlike Saudi Arabia (and the cartel as a whole), in our opinion, the United States is still in a win-win situation. First, the United States is already trying to lower oil prices in order to reduce unit costs and overcome inflation. So the price reduction during the price war is quite beneficial to them. Secondly, if Saudi Arabia does follow the path of reducing production, then the United States, by increasing production and exports, will continue to increase its market share, squeezing OPEC+ out of traditional markets, as happened with Russia in Europe. Thirdly, it is worth recalling that the average break-even point for independent shale companies is at $54 per barrel, and even lower in a number of fields (below $45 per barrel). Moreover, it should be borne in mind that some shale companies have come under the control of major leading oil companies in the world, whose break-even point is even lower. So, if Saudi Arabia is really going to start a price war to reduce the supply of oil, then a number of questions arise: are the Saudis ready to push prices to $ 40-50 per barrel, for what period and how are they going to finance their budget in this case while reducing revenues from oil exports?" the economist noted.
His colleague Dudchenko agrees with this conclusion. He also made an assumption about which of the "sworn friends" - Saudi Arabia or the United States - could become the main beneficiaries of this process.
"Having significantly increased production, the United States, on the one hand, "pinned down" the price (as well as its inflation), and on the other hand, they are forcing the Saudis to pay for it by the need to reduce production and, as a result, falling revenue from oil exports. In 2023, Saudi Arabia's trade balance decreased by 25.5%," he recalled.
Confusion and vacillation
It is not only Russia that is thinking about what oil prices will be in 2024. For example, analysts from the American bank Goldman Sachs predict strong volatility in oil prices. In their opinion, they will range from $70 to $90 per barrel. Earlier, they expected that the quotes would fluctuate in the range of 80-100 per barrel. Their colleagues from Bank of America also lowered the Brent oil price forecast for this year by $10. In their opinion, the cost of Brent crude oil will be $ 80 per barrel.
The price of Brent crude oil will remain in the range of $70 to $80 per barrel until markets can get more clarity on the global supply-demand ratio during the year, according to analysts at broker Exinity.
According to Arutyunyan, supply and demand this year will be determined by the United States, which is increasing oil production and exports, and OPEC+, which is trying to balance supply and demand and prevent a collapse in prices. The confrontation between them will continue, the expert stressed.
"At the same time, it is quite possible that oil prices will plunge down again (especially if there is a slowdown in global economic growth or a threat of recession). But we do not think that oil, as one of the main energy resources, has no future. To paraphrase Mark Twain, we note that rumors about the demise of fossil fuels are clearly exaggerated. At the same time, we do not forget about the growth of geopolitical tensions in the world as a factor counteracting the decline in oil prices," the source added Finam.ru .
According to Dudchenko, the situation with the Yemeni Houthis firing at tankers in the Red Sea has not been completely resolved.
"The US Navy also had to admit this, saying that Operation Prosperity Guardian is designed to protect all ships en route, but patrolling each carrier ship is impossible. Secondly, next weekend we are waiting for elections in Taiwan, which will add nervousness to the market. Finally, it is far from a fact that the United States will be able to continue increasing production in the same way as in the previous year. Yes, there is some potential, but the number of drilling rigs is decreasing and, apparently, production growth is unlikely to be as strong. Support for Brent crude futures remains at the level of $ 75.5 per barrel, resistance is in the range of $ 78.3-$79 per barrel," the analyst summed up.
