Happy New Year, All. When the last report of 2023 was published on December 22 the front-month settled at $79.07/bbl. Yesterday the European benchmark closed at $75.89/bbl suggesting a relatively uneventful festive period, but this assumption cannot be further away from the truth. There has been a set of US inventory data to digest in the interim, not to mention the escalating tension both in Ukraine and in Gaza. The market bade farewell to 2023 with a considerable liquidation of length and persisting anxiety about the geopolitical outlook failed to draw buyers back to the fore as the new year has kicked off.

The penultimate EIA inventory report of 2023 saw a 4.2 million bbls drawdown in crude oil stocks whilst the main product stockpiles built by 2 million bbls (gasoline) and 2.2 million bbls (distillate). The culprit was the 3.1% increase in refinery utilization rates, which stood at 93.3% for the reporting period ending December 22. Although the report appeared balanced total commercial US oil inventories declined by 15 million bbls due to the 15.1 million bbls plunge in the “Other Products” category.

More importantly, there has been an elevated level of atrocities between the warring parties in Eastern Europe, as well as in the Middle East. Although the supply of oil has not been affected as reflected in yesterday’s oil price sell-off the nervousness is conspicuous. In Ukraine, attacks from both sides have been intensifying. After carrying out airstrikes across the country on Friday, Ukraine responded in kind and struck the Russian border town of Belgorod a day later reportedly killing at least 24 people. The retaliation of this retaliation then swiftly arrived in the form of the biggest bombardment of the war by the aggressor, this time on the Ukrainian city of Kharkiv where the number of dead has totaled at least 45. As Russia has stepped up its drone attacks on Ukraine the country’s president has threatened to continue striking Ukraine’s military installations, which, in his vocabulary includes civilian targets.

The escalation of hostilities is equally noticeable around the Red Sea. After the October 7 terrorist attack of Hamas on Israeli civilians the country’s Prime Minister has warned that its offensive to eradicate Hamas is expected to last throughout 2024 irrespective to the ever-growing number of civilian casualties, which have so far reached 22,000 whilst hundreds of thousands of displaced Gazans are now living in the open as the Israeli military advance relentlessly continues. The inevitable consequence of any conflict Israel is involved in is the drawing in of the Iranian-backed and Yemen-based Houthi rebels. In the present flare-up of tension, it is embodied by regular attacks on commercial vessels in the Red Sea, which entails military response from Israel’s staunchest ally, the US. In the latest episode, the US Navy repelled an attack on a container vessel by Houthi rebels killing at least 10. The reported arrival of an Iranian warship and the killing of Hamas deputy leader in Beirut amount to a significant escalation of tension in the region that could potentially result in oil supply disruptions in addition to re-directing ships leading to longer voyage times and higher insurance.

A Review to Preview

Last year can be characterized by uncertainty and identifying the main sources behind this precariousness can provide a helping hand for investors as what to focus on in 2024. The major, and admittedly subjective driving forces in 2023 were the Ukrainian and Israeli hostilities, the fight against inflation, Chinese economic hardship, the OPEC+ failed effort to meaningfully support our market by reducing output and the COP28 climate conference held in the UAE in December.

As outlined above both the Ukrainian war and the Israel-Palestine antagonism will likely dominate investors’ thinking in the new year. The former will not succeed without western help and the willingness to provide financial and military assistance for Ukraine has been floundering of late. Political horse-trading both in the US and in the EU deprived Ukraine of vital aid in the second half of last year and without external support the country’s efforts to successfully resist the invader will suffer a serious setback. The Middle East crisis has been broadly constrained, so far, but should Persian Gulf oil producers be directly drawn into the conflict the repercussions on the oil balance will be understandably catastrophic.

Central banks have seemingly done an effective job in raining inflation in by raising the cost of borrowing to the appropriate amount. There was a growing consensus in the second half of the year that peak rates have been reached in major economic juggernauts and the guessing gamer is now in full swing when easing the currently tight monetary conditions will become reasonable. Without elaborating, what will be relevant is the interest rate gap between the US and other regions as it will have a profound impact on the dollar’s exchange rate considerably impacting oil demand in non-dollar denominated economies. The other salient factor shaping global oil consumption will be China, where political and national security considerations have negatively affected the economic performance with the real estate and manufacturing sectors particularly under the cosh.

The supply side of the oil equation in 2023 was dominated by the by the OPEC+ efforts to tighten the market by reducing nameplate production by more than 5 million bbls since October 2022. This void was happily filled by non-OPEC+ producers, chief amongst which was the US as the world’s biggest consumer and producer pumped as much as 13.3 mbpd towards the end of last year. The trend is expected to last throughout 2024 but a relevant swing could come from non-OPEC+ supply growth outpacing the expansion in global oil demand causing additional migraine-type headache for the producer alliance, whose unity and even its existence has been questioned of late as Angola decided to leave the cartel.

Last but most definitely not least, the importance of last month’s climate summit must not be underappreciated and will reverberate this year and beyond. Describing the crucial meeting as historic is probably a stretch but the agreement between almost 200 countries to “transition away from fossil fuels” gave the world a fighting chance to keep global warming 2°C and maybe even 1.5°C above the pre-industrial temperature. Demand for fossil fuel will persist in coming decades but the question is how quickly renewables will be able to overtake the role of coal, gas, and oil.

Last year was undoubtedly a roller-coaster ride. A general weakness in the first half of the year was followed by an impressive rally between July and September only to end the year on a somewhat downbeat note. The bad news is that after Russia’s shock invasion of Ukraine, last year was even more unpredictable than 2022. The good news is that 2023 will likely prove less erratic than the incumbent year, especially if Donald Trump re-occupies the White House, in which case most predictions and forecasts will be upended, and the investment climate will become even more dubious than it is now.

Overnight Pricing

tamas.varga@pvm.co.uk

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