Oil prices may be soft in 2024 amid surprisingly ample supply
While demand for crude oil held up over the past year, the growth in oil supply has been surprisingly robust. The result has been softer oil prices, and that phenomena may continue in 2024, says Sarah Kiernan, head of Americas Commodities Sales in Global Banking & Markets at Goldman Sachs.
“Most of the focus, if you go back a year ago, was: soft landing or no soft landing? What would demand look like?” Kiernan says. “Demand actually delivered, but the supply really outpaced it.” She points out that US producers aren’t reinvesting capital like they used to, but they’re still looking to grow. Oil output cuts by some OPEC members, meanwhile, don’t appear to be as deep as feared.
We spoke with Kiernan about the outlook for oil in 2024, her takeaways from the COP28 climate summit in Dubai, and how her clients view the oil market.
Is US oil output likely to continue to climb?
We expect to see the level of growth moderating — but there still will be growth. Rig counts are down from where they were at the end of 2022. The amount of free cash flow that US oil producers are reinvesting in capital expenditures is down materially. It’s around 50%, whereas 10 or 15 years ago it was over 120% or 130% of free cash flow. Big picture, the amount of capital discipline that oil producers are employing in the US is a huge change from a decade ago. But that doesn’t mean zero growth. They are still looking to grow, especially at these prices.
And that supply growth is softening the market?
The growth out of the US and some other places like Brazil was higher in 2023 than expected. Most of the focus, if you go back a year ago, was: soft landing or no soft landing? What would demand look like? Demand actually delivered, but the supply really outpaced it.
And why were the cuts that OPEC announced in November not enough to firm the market?
Ahead of the November OPEC meeting, the market had been expecting and starting to price in significant cuts — mandatory cuts. While cuts were delivered, they were entirely voluntary. That came as a result of some disagreements among various member nations, especially Angola and some of the African nations. With voluntary cuts, then it becomes harder to know what's actually going to get enforced. Even with mandatory cuts, there’s usually some level of noncompliance.
How does that affect your view of the market for 2024?
My colleagues in investment research have been of the view that there is a $20 price collar around the market. The idea is that OPEC provides a floor price around $70-80 a barrel, because they don’t want to see it go lower because of the budgetary needs of many of the OPEC nations, and then above $90-100 a barrel the benefit from higher prices starts to erode. If you see a waning ability to control the amount of supply in the market, their ability to hold that floor can come into question. We've spent more time towards the bottom of that range than the top over the past year, even with the demand growth in 2023.
So right now, the risk to the market is skewed to the downside?
Oil prices have fallen since the November OPEC meeting, so people seem attuned to the potential for a softer market than many had originally expected for 2024. But the fundamental supply/demand risks are still likely more skewed to the downside, with political tail upside risk always present and highlighted through recent events like the Houthi attacks on shipping in the Red Sea. In terms of the fundamentals, people are watching inventory balances, and the shape of the curve right now is not showing a tight market. Most people had been looking in the first half of 2023 for the actual physical inventory balances to tighten up significantly in the back half of the year. Then, as we got into October and November, I think the physical inventory balance has been looser than was expected.
What news from the UN Climate Change Conference caught your eye?
It was interesting to hear about how much money is being plowed into carbon capture and other technologies that will be important in the future for carbon abatement. It’s especially notable where that’s being done by companies that are sovereign-backed — as they have the benefit of actually having the money to do it.
A big headline from the meeting was the US announcement about final standards for methane capture and methane monitoring. That was not market moving, though, because it reflects what’s already happening at most oil and gas companies. It makes sense, both from a climate perspective and financially for the companies. A lot of people are supportive of it.
What are you hearing from clients about the oil market right now?
Over a couple of years, in 2021 and 2022, oil was really kind of a macro asset class. People were interested in it from a macro perspective as they focused on inflation risk. Economic trends were bringing greater interest to oil and other commodities either as a portfolio hedge or an interesting diversifying asset class because they’re drivers of inflation. In 2023, oil really returned to being more of a micro asset class, with people focused on these supply-demand balances, what we call the nowcast data of actual inventory balances.
With oil, there will always be political turmoil headline risk. People might buy out-of-the-money call options when there are fears of spreading geopolitical conflict. There’s enough spare capacity that the base case is that there shouldn’t be huge upside, shouldn’t be any explosive moves higher in 2024. But there’s always that risk of a kind of targeted political event that would make people want to buy upside insurance.
This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.