Oil Prices Will Head Higher Next Year on Rising Demand

Those concerns have been superseded by worries about the global economy, according to Carl Weinberg, founder of High Frequency Economics and its chief international economist. Weinberg wrote in a client note on Thursday, “No new events have fueled fear that the war between Israel and Hamas will spill over to interrupt oil supplies. The Russian invasion of Ukraine seems to have already hit its peak impact on global supplies. And, of course, fear that OPEC+ production cutbacks will lead to a worldwide oil shortfall have proved to be baseless.”

Saudi Arabia’s energy minister blamed speculators for the slide in prices. Oil demand is robust, said Prince Abdulaziz bin Salman, according to Bloomberg. “People are pretending it’s weak. It’s all a ploy.”

Speculators might well be behind the swings in oil, although not as the prince contended, says Walter J. Zimmermann Jr., chief technical strategist for ICAP. Fears of supply interruptions typically spur the oil trade to buy “just in case” while small speculators hop onto the long side. When no supply disruption takes place, the market gets hit with liquidations of these positions, which, without the war, wouldn’t have been bought in the first place.

Other market indications point to supply shortage concerns that are now abating. In particular, backwardation is easing, as the price premium for the front, or most proximate, contract has fallen by more than those for more distant contracts. When there are fears of shortages, prices of contracts for sooner delivery get bid up. The March 2024 contract was trading on Thursday for less than a dollar under the front contract, compared with a spread of more than $5 a barrel on Oct. 6.

These technical factors might explain some of oil’s slide over the past month or so. But the decline appears fundamentally driven. There is no shortage of supply, while worries persist about the global economy.

Yet recession concerns don’t jibe with the stock market’s 5% advance, marked by eight straight sessions of gains that ended on Thursday; by Friday, the rally resumed. Stocks’ gains came on the heels of a sharp bond rally, which took the benchmark 10-year Treasury yield down from a peak of just over 5% to about 4.5% on signs the Federal Reserve might be done raising its short-term interest-rate target.

The drop in bond yields was also abetted by the slide in oil. Lower fuel costs ease upward pressures on consumer prices, Weinberg notes.

AAA’s tracking of gasoline prices shows a drop of 29 cents a gallon in the past month, to $3.39 on Friday.

That could be as good as it gets for motorists, however. For investors in oil stocks and the commodity itself, the outlook is for higher prices next year after a mostly frustrating 2023 in the energy sector.

Based on supply-demand fundamentals, Brent crude—the international benchmark—should average $118 a barrel in 2024, up from $80 currently, according to a BCA Research report from Robert P. Ryan, chief commodity and energy strategist, and Ashwin Shyam, associate editor for commodity and energy strategy.

UBS’ Global Wealth Management also sees Brent moving higher, to the $90 to $100 a barrel range. Stronger global demand plus discipline by oil producers should underpin the market, the firm says in a client note.

Many see global demand for oil rising in 2024. OPEC expects an increase of two million barrels a day in 2024, while the International Energy Agency forecasts an 800,000 daily move.

Moreover, RBC Capital Markets’ global commodity research group sees a chance for Saudi Arabia to extend its voluntary output cut of a million barrels a day into the first quarter of next year amid fading Middle East geopolitical risk and market concerns about Chinese demand. The bank writes in a research note that there is a strong diplomatic push to secure the release of hostages held by Hamas in return for cessation of Israeli airstrikes. “A clear concern is that a failure to secure such a settlement could lead to a much wider conflict,” RBC concludes.

BCA anticipates a higher price being paid to refill the U.S. Strategic Petroleum Reserve—to $79 a barrel, up from $70—putting a floor under prices. Should the war expand to include Iran and its proxies and drive crude prices above $120, Saudi Arabia and the U.A.E. could release up to 2.5 million barrels a day, BCA adds, keeping oil roughly in that range.

BCA advises investors to take positions in the
SPDR S&P Oil & Gas Production
exchange-traded fund (ticker: XOP). UBS recommends that risk-taking investors add long positions in longer-dated Brent futures, now trading at a discount to current, or spot, prices. Those are implicitly bets against a global recession.

Write to Randall W. Forsyth at [email protected]