The Red Sea remains a battle zone. Vessels are rerouting despite a heavy presence of naval fleets to counter the Houthis. Yemen has been attacked, in addition to Israel’s onslaught on Gaza. Opec has recently announced fresh production cuts extending deep into 2024. Demand in the US is seen rising. China is building inventories. The US crude stockpile went down from a month ago. Yet, international crude oil prices have refused to budge – showing strong resistance at and around $80//bbl.
What gives? There is no clear answer as observers have been puzzled at the geopolitical risk premium not catching up with substantial disruptions caused by the ongoing events. So much so that the likes of JP Morgan said in the latest oil market outlook report that the Brent crude price at current levels does not carry a geopolitical risk premium. In the not-so-distant past, events of much smaller magnitude causing smaller disruptions had resulted in a risk premium close to $10/bbl.
In all fairness, logistic and fleet observers maintain that rerouting of vessels to take the longer African route instead of the Red Sea, does not add more than $2-3/bbl to the overall cost. There is that, plus Opec seems to have a much-reduced impact in terms of being the price setter – as it has repeatedly failed to have a sustained bull rally – despite slashing production aggressively in the last 12 months.
Opec, in its latest market outlook report, maintained expectations of strong demand growth in 2024 and 2025 – maintaining that demand surpassed supply at most points. But, on the other hand, the oil rigs count in North America has been steadily improving, week after week. Despite a major dip in rig count from the heavyweight Texas, Canada has been ramping up rigs – adding 10 of the 11 rigs last week in the region.
Shale production has flattened of late but is considered enough to keep prices from rallying high. The US produced more oil in 2023 than any other country – and agency estimates record production of oil in 2024 and 2025, shielding consumers from the war effects and Opec’s interventions.
What happens next is guesswork, but the Opec Plus group may well be running out of options. The group ended up producing more than the quota last month, as smaller members are running out of patience. Saudi Arabia may soon find itself fighting a lone battle, if it feels the need to crush production targets further in the next meeting.
What must not be forgotten is that the oil industry has years of underinvestment in drilling, fracking, and storage. A stronger than expected demand resurgence could well test the supply side towards the second half of 2024.
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