The beginning of the new year sees the global oil market on edge due to escalating geopolitical tensions in the Middle East, according to the International Energy Agency’s (IEA) first Oil Market Report of 2024. The region, responsible for a third of global seaborne oil trade, poses a significant risk of potential supply disruptions.
Despite the absence of actual production losses, the IEA notes that the oil market appears well-supplied for the year. The report highlights the persistent risk of global oil supply disruptions stemming from the Middle East conflict, particularly concerning oil flows via the Red Sea and the crucial Suez Canal.
The recent strikes by the U.S. and the U.K. against Iran-backed Houthi rebels in Yemen, following numerous attacks on Red Sea shipping by the Houthis, have heightened concerns. There are worries that an escalation of the conflict could further disrupt the flow of oil through key trade chokepoints.
Since November, Houthi rebels have carried out multiple attacks on ships in the Red Sea, ostensibly in support of Palestinians in Israel’s conflict with Gaza. The retaliatory strikes by the U.S. and the U.K. caused oil prices to surge above $80 per barrel. Prices climbed even higher after a Houthi missile strike set an oil products tanker ablaze on January 26, pushing oil to trade just under $84 per barrel.
The IEA’s report from 2023 revealed that approximately 10 percent of the world’s seaborne oil trade passed through the Red Sea, equivalent to about 7.2 million barrels per day. This included crude oil, refined products, and 8 percent of the global liquefied natural gas trade. Some ship operators and major oil companies, such as Shell, BP, and Equinor, opted to circumvent the Bab al-Mandab strait, choosing the longer route around the Cape of Good Hope. This decision resulted in increased freight and insurance costs, along with potential delays in goods deliveries, which could contribute to inflationary pressures on importing nations’ economies.
In terms of the oil outlook for 2024, the IEA’s January 18 report projects oil demand growth to be approximately half the level observed in 2023. This reduction is attributed to below-trend GDP growth in major economies, increased energy efficiency measures, and the electrification of the transportation sector. The demand is expected to grow by 1.2 million barrels per day, compared to 2.3 million barrels per day in 2023. The decrease is partly due to a sharp drop in gasoline use from 720,000 barrels per day to 150,000 barrels per day.
The first quarter is anticipated to witness supply tightness due to voluntary production cuts by some OPEC+ producers. However, the market is expected to become more well-supplied, with overall supply potentially reaching a record 103.5 million barrels per day. The growth will be led by increased production from the U.S., Canada, Brazil, and Guyana.
The IEA and OPEC have differing assessments of the global economic outlook. While the IEA projects “subdued global economic growth,” OPEC is more optimistic, forecasting a robust economic growth of 2.6 percent and a 2.5 million barrels per day rise in oil demand in 2024. OPEC+ countries will closely monitor global stock levels, with the IEA noting a collective holding of approximately 4 billion barrels, providing a buffer for potential supply emergencies.
Moreover, the IEA estimates the effective spare capacity of 5.4 million barrels per day among OPEC+ producers (excluding sanctions-hit Iran and Russia), with Saudi Arabia accounting for about 60 percent of this cushion. The OPEC+ group, led by Saudi Arabia and Russia, will monitor stock levels in the first quarter to determine whether production cuts should be extended beyond March based on the drawn-down inventories. The OPEC report suggests a drawdown of 570,000 barrels per day in global inventories during the first quarter, potentially prompting a gradual easing of cuts and an increase in output to meet demand projections.