Oil prices outlook: DWS strategist expects balance between supply and demand on the oil market by 2024

• Fluctuating year 2023
• Geopolitical uncertainties
• Supply and demand in focus

Advertising

Geopolitical conflicts move oil prices

The oil price was characterized by strong fluctuations in 2023. One of the main reasons for the volatile market: geopolitical conflicts. Not only did Russia’s ongoing war of aggression against Ukraine put a strain on the markets for black gold due to the sanctions against the aggressor, the war in Israel added another factor of uncertainty. Iran, one of the world’s main oil producers, is considered an important financier of the Islamist terrorist group Hamas. The state also borders the Strait of Hormuz, where around 20 percent of global oil deliveries take place, as Capital writes. Market participants are therefore worried about an escalation of the conflict, which could dramatically affect access to crude oil.

Focus on the Middle East conflict

Darwei Kung, Head of Commodities and Natural Resources at Deutsche Bank subsidiary DWS, is also watching the situation in the Middle East with concern. “At the moment we are clearly dependent on the countries of the Middle East being able to continue producing the promised quantities,” the expert told MarketWatch. “Should there be an escalation of the conflict between Hamas and Israel that spills over into other Middle Eastern countries and prevents either the production or transportation of oil from the Gulf or the Red Sea, then this would lead to a shortage of oil .”

monetary policy sets the tone

In addition, the oil price in 2023 was primarily influenced by the monetary policy of central banks, said Kung. The US monetary authorities at the Fed raised the key interest rate for the first time in this cycle in 2022 and continued to do so in the following year. Other central banks followed the example of the US Federal Reserve. This approach has slowed economic growth in many economies, which has also increased pressure on oil prices, the expert told MarketWatch.

US production above expectations

It is also worth mentioning that US liquid petroleum production in 2023 was well above expectations. Between 2022 and 2023, oil production of 300,000 to 400,000 barrels per day was estimated; in fact, the production volume is likely to approach 1.3 million barrels per day on average. The increase in production in the USA in particular helped to build up the oil supply.

Furthermore, according to Kung, oil giants Chevron and ExxonMobil failed to meet the market’s revenue expectations – albeit just barely. In the following quarters, companies are likely to struggle with satisfactory earnings and dividend payments and may also increase their capital expenditures. But British competitor BP also encountered some challenges in 2023, as the DWS analyst explained. Not only did problems arise with one of the oil company’s wind projects, there were also difficulties with its plans for renewable diesel production.

Demand risks remain

According to Kung, risk factors can still be seen not only on the supply side, but also in demand. “Demand is still a difficult issue,” the strategist continued. “Even though China has bought quite a bit of oil, we believe a lot of that has actually gone into inventories. Whether or not the Chinese economy can continue to grow will have a very big impact on demand. Outside China, interest rates are clearly higher, meaning additional demand will likely also be slower.” In addition to the supply of oil, the demand for the raw material will also affect its price, as Kung concluded.

Waiting for OPEC caps

The Organization of the Petroleum Exporting Countries (OPEC), which according to its own information held an 80 percent share of global crude oil reserves in 2022, also remains in view. 67 percent of OPEC oil reserves are also located in the Middle East. “It will be very interesting to see how OPEC countries adjust their caps next year (2024) to accommodate countries that can produce more and countries that have difficulty meeting their quota,” Kung told the Portal.

Does e-mobility seal the fate of the oil price?

Kung identified the main use of oil as transportation, whether of goods or people. Accordingly, a large part of the oil requirement also comes from passenger cars. If demand for electric vehicles increases in this area, this should also have an impact on the price of oil. “If consumers decide to use electric vehicles, this will lead to higher demand for electricity generation than oil,” he said. “Most people debate when peak oil demand will be reached, and whether it will be 2030 or 2040 depends on how quickly the infrastructure can be built to supply energy and replace the vehicle fleet.”

Balance between supply and demand expected

Even if the oil price was largely characterized by constant ups and downs in 2023, it is likely to stabilize by the end of 2023, but at the latest by the beginning of 2024, as Kung predicted. The DWS analyst sees the reason for this as supply and demand aligning. However, he expects economic growth to pick up again in the second half of 2024, which will drive demand for oil again. Accordingly, there will likely be a supply deficit again by the end of 2024 at the latest, which is likely to further drive up the price of crude oil.

Editorial team finanzen.net

This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.

Selected leveraged products on BP

With knock-outs, speculative investors can participate disproportionately in price movements. Simply select the lever you want and we will show you suitable open-end products on BP

The leverage must be between 2 and 20

Advertising