Why Oil Prices Never Surged to $100 This Year
Prices defied expectations but could prove more volatile in 2024
WSJ
Travelers, truckers and shippers worldwide can thank the U.S. for helping keep a lid on oil and gasoline prices this year.
A year ago, Wall Street analysts were predicting the international benchmark for oil prices would surge from roughly $86 a barrel to well over $100 in 2023. Instead, futures on Brent crude declined 10% to finish the year trading for about $77 a barrel, though experts warn any spread in global instability could drive it higher.
Behind the surprise: actions by the Biden administration and U.S. oil companies that resulted in an unexpected surge of petroleum supplies.
After Russia invaded Ukraine, many analysts expected Moscow’s oil exports would be significantly curtailed by Western sanctions. Instead a novel price-cap scheme designed by the U.S. and adopted by its allies curbed Russia’s oil revenue while allowing its supplies to flow nearly unimpeded.
Similarly, relaxed U.S. enforcement of sanctions let Iran increase exports to countries including China and Venezuela, further weighing on prices.
The U.S. government focused on “ensuring the oil market did not experience any shortages” because of their potential to drive up gas prices and inflation, said Francisco Blanch, head of global commodities and derivatives research at Bank of America.
Meanwhile, U.S. oil companies pumped more petroleum this year than ever before due largely to faster drilling speeds, longer wells and other efficiency gains. The country is expected to average a record 12.9 million barrels a day of crude oil production this year, a million more than in 2022 and nearly 600,000 more than previously forecast, according to federal record-keepers.
The stepped up output blunted repeated efforts by the Organization of the Petroleum Exporting Countries and its allies to lift prices by cutting production and exports. Brent crude surged to near $100 a barrel in September, only to quickly retreat in the face of a deluge from the U.S. and from other non-OPEC countries.
Gasoline and diesel fuel prices have followed those of crude oil lower, helping bring down inflation. The national average price of unleaded gas is currently $3.12 a gallon, 8 cents lower than at the start of the year, according to AAA.
Patrick De Haan, head of petroleum analysis at GasBuddy, said he is optimistic that figure will fall below $3 by the end of winter.
For 2024, analysts broadly expect oil prices to stay relatively stable. But some warn that notoriously unpredictable shifts in geopolitics could upset the delicate balance.
Earlier this month, oil prices jumped after Yemeni Houthi rebels attacked vessels in the Red Sea, opening a new front in the war between Hamas and Israel that led to shipping disruptions.
Goldman Sachs estimated that the impact on oil prices of such disturbances in that area would be limited to a few dollars a barrel. But it said a closure of the Strait of Hormuz could trap vast quantities of crude in the Persian Gulf and spur prices higher by at least 20%.
The Red Sea disturbances and Venezuela’s recent threat to annex part of oil-rich neighbor Guyana are among the reasons why David Kotok, co-founder and chief investment officer at Cumberland Advisors, expects global instability could drive up oil prices.
“This is not just Gaza and Israel,” Kotok said. “This is much bigger. And the people who focus on the narrow are missing that.”
U.S. oil production might not be able to offset continuing global disruptions, either. This year’s robust output was powered in part by companies such as CrownRock and Hess boosting production to appear more valuable before they agreed to be acquired by Occidental and Chevron, respectively, said Amrita Sen, co-founder and director of research at Energy Aspects.
Private oil producers, which have been responsible for a disproportionate share of production growth recently, are pulling back from drilling due to tightening credit conditions and higher interest rates, Sen said. The number of oil rigs operating in the U.S. has declined to 500 from 621 over the past year, according to oil-field services firm Baker Hughes.
Without any significant escalation in global conflicts, however, Daan Struyven, head of oil research at Goldman Sachs, thinks Brent will remain relatively stable and bounce between $70 and $90 a barrel.
He expects OPEC to cut output further if prices sink below that range, and to reverse some of its reductions if they rise above it.
Natasha Kaneva, head of global commodities strategy at J.P. Morgan, forecasts that Brent will average $83 a barrel in 2024. OPEC has been trying to lift oil prices to an unsustainable level, Kaneva said, given slowing global demand growth and new offshore sources that are on the way.
“What we’re saying is ‘Listen, you should consider accepting a lower price range, there is absolutely nothing wrong with $80 oil,’ ” Kaneva said.
