Crude oil prices are expected to cool down in 2024, but the risk of price increases remains due to geopolitical conflicts in major oil-producing regions.

Global crude oil prices have been rising since late 2023. WTI crude oil (August 2024 futures) increased from around $70 per barrel to $85 per barrel in April 2024. Brent crude prices have shown a similar trend, reaching $90 per barrel in April after rising steadily for four months from the beginning of 2024. This is attributed to a decrease in global oil inventories, geopolitical tensions such as the conflict between Iran and Israel, and expectations of early interest rate cuts by the Fed in 2024.

Source: Barchart, updated as of 21/05/2024

Fund managers were largely optimistic about oil in early April, significantly increasing their net long positions in ICE Brent to the highest level since March 2021, possibly driven by concerns about oil supply amid escalating tensions in the Middle East. Meanwhile, these funds reduced their net long positions in WTI crude oil, due to a sharp increase in short positions.

Source: OPEC

In the first three weeks of May, global crude oil prices (WTI) remained largely flat around $78 per barrel. The Fed's lack of a clear path for interest rate cuts, combined with higher-than-expected weekly US inventory data and bolstered US crude oil production, influenced market sentiment. Additionally, negative news for oil prices includes OPEC+ members wanting to increase crude oil production, with Bloomberg reporting UAE, Iraq, Algeria, and Kazakhstan as the contributors, while Saudi Arabia opposed this and warned the OPEC+ group to be cautious about adding more oil to the market.

EIA notes that the voluntary production cuts by OPEC+ are reducing global oil inventories in the first half of 2024, with an estimated average of 0.3 million barrels per day. Some OPEC+ producers are expected to continue limiting production after the current voluntary cuts expire at the end of June.

Another factor, according to the US Energy Information Administration (EIA), is that despite geopolitical tensions, oil price volatility has eased due to large surplus production capacity. Surplus capacity refers to the total amount of oil that can be brought into production within 30 days and sustained for at least 90 days.

If holders of surplus production capacity choose to deploy it, supply could be readily available for the oil market in case of any short-term supply disruptions. OPEC's surplus production capacity is estimated to be around 4 million barrels per day through 2025.

EIA expects continued restrictions on oil production and forecasts a relatively balanced market in the second half of 2024, with oil prices holding near $90 per barrel. However, as supply grows significantly, global oil inventories are projected to increase by 0.4 million barrels per day in 2025, leading to a reduction in average oil prices to $85 per barrel in the following year. Nonetheless, uncertainties in the Middle East may increase price volatility and lead to a sharp rise in oil prices.

Source: Compiled