crude oil
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Crude Oil Prices May Keep Falling Despite Two Wars, OPEC Cuts

By:Ilya Spivak

Crude oil prices are on track to end 2023 with a loss despite a flood of would-be reasons to go higher. A deeper downturn looks likely in 2024

  • Crude oil is set to fall in 2023 despite two wars and OPEC+ output cuts.
  • Prices appear focused on cyclical fundamentals of supply and demand.
  • Anemic global economic activity bodes ill for crude oil prices in 2024.

To read the breathless headlines, crude oil prices had every reason to skyrocket in 2023.

Russia put its 11.8% share of global supply in jeopardy when it invaded Ukraine in 2022. Now after an attack on Israel by Gaza-based terrorist group Hamas, a war in the Middle East threatens supply from world’s biggest oil-producing region.

At the same time, Saudi Arabia has led the Organization of Petroleum Exporting Countries (OPEC) as well as the cartel’s oil-producing allies – collectively known as “OPEC+”—have pledged to cut production. Taken together with a treacherous geopolitical backdrop, it isn’t hard to imagine supply disruption fears driving price gains.

Two wars and OPEC output cuts: who cares?

The markets reasoned otherwise, and the benchmark WTI crude oil contract is on track to end the year with a loss.

What’s more, the trading range narrowed to the smallest since 2019. This seems to speak to a relatively sanguine disposition from traders. They apparently saw little to inspire sharp price swings.

crude oil tracks overall commodities demand

As it turns out, market participants cared much more about the cyclical fundamentals of supply and demand than they did about would-be disruptors. An index of global commodity prices excluding energy and WTI have been moving in lockstep, implying that crude oil is taking its cues from broad-based trends in global demand for raw materials.

This makes sense. OPEC+ has shown itself to be mostly ineffective. The group has overshot its quota every year since beginning coordinated output cuts nearly a decade ago. Ensuring that members maintain a united front has proven elusive. Meanwhile, skirmishing along key delivery routes has had negligible impact on shipping rates.

Crude oil at risk as the global business cycle turns

The cost of transit on a Suezmax tanker—the largest vessel able to be cross the eponymous canal fully loaded from the Arabian gulf to the Mediterranean—hardly responded as the guns began to fire in Ukraine and Gaza. This speaks to two things: a lack of urgency in Europe, and minimal delivery risk premium.

economic cycle drives crude oil shipping costs

In fact, shipping prices seem to track global trade volumes, with a lag of about seven months. The upturn in economic growth amid the worldwide reopening after the COVID-19 pandemic echoed in higher transport costs. Cooling demand thanks to a round of steep interest rate hikes by most major central banks is now having the opposite effect.

If it is only the business cycle that truly matters, all this bodes ill for oil prices. Leading purchasing manager index (PMI) data puts the global economy near standstill. Meanwhile, market-watchers polled by Bloomberg are on a many-month campaign to cut growth forecasts. Economic data flow analysis by Citigroup warns they’re still too optimistic.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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