On paper, oil should be at stellar levels. A war in Ukraine that has forced the Europeans to rethink energy policy without Russian crude oil; incessant bombings in the Middle East, with a crisis in the Red Sea, ships fleeing the Suez Canal and Iran at risk of becoming involved in the conflict and production cuts of nearly 900,000 barrels per day by of the OPEC cartel with the aim of sustaining prices. Even the World Bank, always cautious in its analyses, came a few weeks ago to predict the possibility of seeing the barrel close to 150 dollars, in the hypothesis of a long-scale geopolitical conflict.
And yet the barrel has so far dodged bombs and wars. The last quarter has chained several consecutive sessions down with a cut of almost 20% from the highs at the end of September. Ultimately, 2023 ended in annual losses (over 6%), marking the first year in the red since the pandemic shock of 2020. Today prices are at $79 a barrel, when in 2022 on average they were at 95. Why isn’t oil going up?
The first reason is the simplest: supply and demand are balanced. From the production side, if OPEC closes the tap, the United States opens it. The Americans have once again consolidated the world leadership, which they achieved in 2018. Today they are exporting like never before.
According to the calculations of the United States Department of Energy, oil made in the USA already represents 20% of global production, so the distance with regard to Saudi Arabia and Russia has increased in recent years. In absolute terms, at 13.3 million barrels per day in December, the US had never pumped so much oil. “Whatever the old naysayers say, fracking still works very well. The USA is producing at record levels and the sanctions in Russia have not resulted in a significant reduction in oil”, remarks the professor of Stratigraphy and Historical Geology at the UB Mariano Marzo. One proof is that in recent weeks two industry giants, Exxon and Chevron, have invested millions ($60 billion and $50 billion, respectively) to buy Hess and Pioneer Natural Resources, two firms that operate in hydraulic fracturing, which may return brilliance to this industry, which has suffered many ups and downs.
OPEC itself is not experiencing the best of times. Indonesia (2016), Qatar (2019), Ecuador (2020) and Angola (2023) have left the club. Javier Blas, Bloomberg essayist and analyst, recalled that “the three most dangerous words in the oil market are: OPEC is dead”. According to their analysis, some of its members believe that Riyadh is trying unsuccessfully to keep prices too high, just as the world economy may face a slowdown in 2024.
In fact, global demand, according to the International Energy Agency (IEA), will continue to grow (1.1 million barrels per day), but less than half of what it grew in 2023. It should be considered that the China’s growth is no longer what we were used to, when, in addition, it is in a process of increasing adoption of electric vehicles.
2024 is an unknown. “There is a lot of uncertainty, a lot of fear and a lot of prudence in a market that remains in the expectation of meeting the lame ones sitting down”, acknowledges Marzo. In a recent note to investors, Bank of America’s Francisco Blanch cast more doubt. “We believe that the crude oil market may be too optimistic about recent events in the Middle East. The dependence of Asian economies on the oil that flows through the Strait of Hormuz is enormous. Any escalation could trigger a jump to $130.”
World food prices fell by 13.7% in 2023, according to the FAO (United Nations) index. This is a sharp pullback after the upswing in 2022, related to the outbreak of the war in Ukraine. The maintenance of cereal exports, even less than in the past, by Kyiv, the abundance of the Russian and Australian supply of wheat and the good Brazilian harvests of corn and soybeans have favored the fall in prices. But “the fact that the price of raw materials falls does not necessarily imply a fall in the price of food products”, highlighted the economist Bruno Parmentier. The exception to the downward trend is still rice, which rose in 2023
and 21%.
