Oil bulls in play in 2024

Tight balances, low investments and geopolitical instability?

President Joe Biden is seeking to walk a fine line: sending a stern message to his detractors that the world’s most powerful nation will not tolerate an attack on its troops while also trying to ensure that the US does not get sucked into a full-scale war in the region. To be sure, both the US and Iran – which backs many of the militias and groups that attacked the US base and are targeting the Red Sea – do not want a direct confrontation. With decades of experience in politics and high public office, Biden is acutely aware of the costs America has had to bear in terms of casualties, risks and financial outgoes of the decades-long conflict in Iraq and Afghanistan.

Yet, for all his experience, Biden’s hands may be tied. The Republican Party is using every opportunity to label him as frail, blaming the attack on a base in Jordan that killed three US soldiers resulted from a perceived lack of American strength under his leadership. Already bruised by successively low approval ratings, Biden can ill afford for that narrative to stick in the run up to the federal elections. Going on the offensive risks putting more troops in harm’s way, with any uptick in casualties hardly helping in bolstering his re-election chances. Even if there are no major casualties, stronger military action may further irk his moderate and progressive voter base already unhappy with his administration’s inability to rein in Israel in its ongoing offensive in Gaza that has claimed tens of thousands of lives.

On the ongoing conflict in the Middle East, Biden has issued his most critical assessment to date, calling Israel’s actions there “over the top.” That came against the backdrop of an attack on Rafah, one of the last holdouts where more than a million people are sheltering, a move that Prime Minister Benjamin Netanyahu says is necessary to defeat Hamas members hiding in the city. Israel, however, remains undeterred, keeping high the possibility of an even deadlier spillover across the region. Last but not least, Biden also can ill-afford to see an uptick in retail pump prices over the next few months. Memory of the surge in gasoline prices in mid-2022 are still raw for many.   

The unfolding geopolitical crisis has heightened risks in the oil market. Rystad Energy’s Geopolitical Risk Index has increased from around 1.15 in the first two weeks of the year to 1.24 during last week. This is the highest risk level since the final week of November last year.

Those escalations are prompting us to retain a distinctly bullish call on Brent for the whole of 2024, given the fast-drawing inventories for most of the year, with the exception of early spring. Unlike last year, when bearish macroeconomic risks abounded, the risks in 2024 are skewed to the upside. We believe that the geopolitical risks in the Middle East are currently massively underestimated and will result in upside surprises in prices in the case of further escalation. Currently, the cushion is represented by the ample spare capacity in the Middle East, namely in in Saudi Arabia and the United Arab Emirates (UAE), which has helped put a cap on prices. But that is about to change – as both countries will likely start to unwind their voluntary cuts as early as April.

The macroeconomic picture has improved, with global inflation trending down overall, improving the odds of interest rate cuts by both the Fed and European Central Bank. The mood soured somewhat in the US with an uptick in the producer price index in the latest January reading, again reviving talks of the central bank holding its benchmark rate higher for longer. Yet, we still see reductions by the US Fed later in the year. Economic activity will be further supported by elections, with as many as four billion people – more than half of the planet’s population – casting their ballot. Election years tend to be expansionary as campaign-related travel picks up, boosting consumption of gasoline and diesel. This year, the US, EU and India go the polls, to name the largest economies, along with a myriad other. Yet, China remains a question mark, and we will continue to closely track how the world’s second-biggest economy handles the headwinds. Last year it grew by 5.2% despite all the negative headlines surrounding its economic challenges – a rate that is far lower than what the Asian giant has registered for more than two decades, but still robust when compared to any large economy. While China is highly unlikely to ever go back to its heady pace of back-to-back double-digit expansion – as that rate can never be sustained forever – we expected a tally of 4.5% this year. Yet, it is undeniable that its debt-ridden real estate sector still has a long way to go before stabilizing.

Our price outlook is also supported by the US, where the onshore industry – the global supply growth driver through most of last decade – is entering a new phase that we are calling ‘Shale 4.0’. This era is marked by a further increased focus on capital discipline and efficiency improvements. The US Lower 48 (excluding Gulf of Mexico) is not going to grow at the pace seen in previous years. We are calling for an increase of about 370,000 barrels per day (bpd) in oil production this year followed by even lower projections in 2024 and 2025. The massive consolidation wave among the exploration and production companies (E&P), which has seen private players lose market share and with public independents targeting conservative growth targets are some of the main reasons for the slowdown in US shale production.

It remains to be seen whether US public E&Ps will change their production growth outlook post-2025 should there be a call on US volumes with other supply sources failing to meet the robust oil demand growth around the world. Lower investments in upstream exploration and Saudi Arabia’s decision to pause capacity expansions all point to tighter balances unless US output increases from current levels in the second half of the decade.

Exploration results in the conventional space were dismal in 2023. Total non-shale oil and gas discoveries clocked in at 5.7 billion barrels of oil equivalent (boe) last year, with liquids accounting for around 55% of discovered volumes. This signaled the lowest level of conventional discoveries on record in terms of both absolute volumes and reserves replacement, which stood at only 12%. By contrast, the reserves replacement ratio exceeded 100% as recent as 2010 and nearly surpassed 150% in 2006 in the heady days before shale and the Great Financial Crisis.

To be sure, falling conventional discoveries are nothing new or surprising, particularly against the backdrop of shale-induced structural changes in the global resource base. Conventional discoveries declined from 53 billion boe in 2010 to just over 10 billion boe in 2022 at an average rate of 12%, although gas-weighted discoveries in 2015 and 2019 partially bucked the trend. Nor are the 2023 results for lack of trying. After hitting a low of $51.6 billion in 2020, global exploration expenditures partially rebounded to an estimated $63.5 billion in 2022 and remained flattish into 2023. Nevertheless, net value creation headed in the opposite direction when considering total spend against the net present value of recent discoveries. Tellingly, net value creation stood at $18.4 billion in 2020, while 2023 results imply negative value creation of almost $9 billion.

Yet, upstream players maintain a strong interest in new conventional discoveries and have not left the exploration space for dead. In this sense, two distinct trends have emerged in recent years. The first tendency has been to treat conventional discoveries almost as a short-cycle resource base through the pursuit of infrastructure-led exploration and tiebacks to existing facilities, allowing operators to tap new resources at an overall lower capital tendency. The second – and arguably most scintillating – tendency has seen exploration capital follow potential new ‘elephant’ herds into more prospective frontier basins. While some of these ‘herds’ may ultimately prove to be a mirage, it is no accident that many of the upcoming high-impact wells have crowded into frontier hotspots along both sides of the Atlantic Margin, including the Argentine and Potiguar basins offshore South America and the Namibe and Orange basins offshore southern Africa. In any case, we can expect IOCs to continue hunting for the next Guyana- or Namibia-sized elephant, 2023 results notwithstanding.

On the refining and trading side, volatility in oil prices has been high for several years and will likely remain so in the near term. Since the recent peak of crude oil and refined product prices in 2022, global oil production and refining capacity have grown. Global refining capacity had reached a low in May 2022, but recovered to pre-pandemic levels by March 2023, exiting the year at 105 million bpd following further expansion in the second half. Capacity is set to grow another 2.5 million b/d in 2024. The recent refinery capacity additions are sufficient to ensure global product demand can be met. Global oil product demand growth is forecast to slow to by 1.5 million bpd in 2024, down from almost 3 million bpd in 2023. Pandemic demand recovery was still prevalent in 2023 but is now in the past, except for international air travel, which still has some room for recovery. Much of the growth in 2024 is weighted to the second half of the year. Oil product demand is set to grow to 104 million bpd in 2024, supporting refinery throughput. Crude oil and condensate supply is forecast to increase 1.6 million bpd to 84.2 million b/d in 2024. Much like oil product demand, crude oil and condensate supply growth is weighted to the second half of the year. Early 2024 refinery throughput will show only nominal year-on-year growth, and while the low throughput currently is a headwind on crude oil demand, it will cause global refined product stocks to draw. Steep stock draws will then support a stronger call on refining beginning late in the second quarter. 

Refinery throughput will begin to show strong year-on-year growth in June that will intensify through August. Summer oil product demand strength and the commissioning of new refinery capacity will switch the current slightly bearish market sentiment on crude oil demand to hyper-bullish by mid-year. Taken together with the far tempered supply growth from US shale, the strong call on crude runs will support OPEC+ unwinding their voluntary cuts, feeding into our expectations of a bullish call on oil prices for all of 2024.

Overall, our tightening crude and liquids balances point to a steepening Brent backwardation through the end of the year. This is further supported by a rather benign macroeconomic outlook – election years tend to be expansionary, and more than half of the world will go to the poll in 2024 – and by the highly concerning geopolitical instability in both the Middle East and Eastern Europe.

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Claudio Galimberti  

Senior Vice President, Head of North America Analysis

Susan Bell  

Senior Vice President, Downstream

Manash Goswami  

Vice President, Analytics

Thomas Jacob  

Senior Vice President, Supply Chain

Thomas Liles  

Vice President, Upstream

(The data and forecasts contained in this column are Rystad Energy’s and the opinions are of the authors.)