The global oil market is tightening as shipping delays and OPEC+ cuts reduce the availability of crude in Europe and Africa, boosting futures prices.
Rising demand and geopolitical risks
The oil market has been on a bullish trend since the start of 2024, supported by a strong recovery in global demand, especially in China and India, as well as the ongoing output cuts by the Organization of the Petroleum Exporting Countries and its allies (OPEC+).
The demand outlook has also improved as COVID-19 vaccines have been widely distributed, easing lockdown measures and travel restrictions in many countries.
However, the supply side has faced some challenges, as several factors have reduced the flow of crude to Europe and Africa, two key consuming regions.
One of the main factors is the rising geopolitical tension in the Middle East, which accounts for one-third of the world’s seaborne oil trade. Since mid-November 2023, Yemen’s Houthi rebels have launched several drone and missile attacks against shipping vessels and oil facilities in the Red Sea, disrupting the transit of crude from the Persian Gulf to the Mediterranean.
According to the International Energy Agency (IEA), these attacks have caused delays of up to 10 days for some tankers, adding to the costs and risks of transporting oil.
Another factor is the voluntary extra cuts by Saudi Arabia, the world’s largest oil exporter, which have reduced its shipments to Europe and Africa by about 1 million barrels per day (mbpd) since January.
The kingdom announced in January that it would slash its output by an additional 1 mbpd in February and March, on top of its share of the OPEC+ cuts, to support the market amid the uncertainty caused by the pandemic.
The IEA estimates that Saudi Arabia’s production averaged 8.1 mbpd in January, the lowest since May 2020, and expects it to drop further to 7.6 mbpd in February and March.
Futures prices reflect tightness
The supply crunch in Europe and Africa has been reflected in the futures market, where the benchmark Brent crude has risen by about $4 per barrel since mid-December, reaching almost $84 per barrel on Thursday.
The Brent market structure has also shifted to a steep backwardation, a situation where spot prices are higher than future prices, indicating a perception of tight prompt supply and low inventories.
On Thursday, the premium of the first-month contract to the six-month contract reached $4.34 per barrel, the highest since October 2020.
The IEA said in its latest Oil Market Report that global oil inventories fell by 8.4 million barrels in November, to their lowest since July 2022, with crude oil and middle distillates particularly tight.
The agency also revised up its global oil demand forecast for 2024 by 0.3 mbpd, to 99.6 mbpd, as it expects a stronger rebound in the second half of the year.
Implications for the market
The tightness in the oil market is likely to persist in the coming months, as OPEC+ is expected to maintain its cautious approach to easing the output cuts.
The group, which meets every month to review the market conditions and adjust its production policy, has agreed to cut 7.2 mbpd in January, 7.125 mbpd in February, and 7.05 mbpd in March, from a baseline of 43.34 mbpd.
However, the group has also given itself some flexibility to increase or decrease its output by up to 0.5 mbpd each month, depending on the demand and supply situation.
The next OPEC+ meeting is scheduled for March 4, when the group will decide whether to extend the cuts into the second quarter or start returning some supply to the market.
The market will also be watching the developments in the Middle East, as any escalation of the conflict could pose a serious threat to the oil supply and security in the region.
On the other hand, the market could also benefit from some positive factors, such as the progress of the COVID-19 vaccination campaigns, the stimulus measures by the governments and central banks, and the potential revival of the Iran nuclear deal, which could pave the way for the return of Iranian oil exports.
The oil market is facing a complex and dynamic situation, with many uncertainties and risks, but also opportunities and hopes. The balance between demand and supply will be crucial to determine the direction and level of oil prices in 2024.
Source: Reuters
