Oil prices post biggest annual drop since 2020 as demand concerns persist

Brent prices shed 10 per cent in 2023 as geopolitical and economic uncertainties continue to affect the market

A worker operates a drilling rig at the Zhetybay field in Kazakhstan's Mangystau region. Supply growth for crude oil in 2023 exceeded expectations, resulting in a less undersupplied market, analysts sShow more

Oil prices, which endured another roller-coaster ride in 2023, posted their biggest annual drop since 2020 amid persistent concerns about lower demand as well as geopolitical and economic uncertainties.

Brent, the global benchmark for two thirds of the world's oil, shed 0.14 per cent to settle at $77.04 per barrel on Friday, the last trading day of the year. West Texas Intermediate, the gauge that tracks US crude, declined 0.17 per cent to finish at $71.65 a barrel.

Both benchmarks shed more than 10 per cent, or about $8.60, from a year ago – Brent ended 2022 at $85.62 per barrel, while WTI settled at $80.26 – ending two years of gains.

"Despite oil demand growth surprising to the upside and the production cuts by Opec+, oil prices ended lower in 2023 as supply growth also exceeded expectations, resulting in a less undersupplied oil market," Giovanni Staunovo, a strategist at Swiss bank UBS, told The National.

"Oil production in the US and Brazil hit a new record high, while production from cuts-exempted Opec+ members, particularly Iran and Libya, recovered strongly in 2023."

The crude oil market remains downbeat, and a failure to add to gains is now "bringing the oil bears back to the market", Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said in a note on Friday.

"Note that crude oil is set for its biggest yearly decline since 2020; Opec's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year," she said.

Demand growth in 2023 was also hit hard by expectations of an economic slump as central banks around the world tightened monetary policy to tame inflation.

Sentiment in the oil industry turned "decidedly bearish" in November and early December as non-Opec+ supply strength coincided with slowing global oil demand growth, according to the International Energy Agency.

The Israel-Gaza war, which started in early October, initially pushed prices up, although crude soon shed those gains on demand concerns.

Last week, prices again rose on supply concerns after attacks by Houthi rebels in the Red Sea – a key waterway for global trade – forcing shipping companies to reroute their vessels.

The Bab Al Mandeb at the southern edge of the Red Sea and the western part of the Gulf of Aden, is a vital route for oil tankers and vessels travelling between the Arabian Gulf and Asia, as well as to Europe by way of the Suez Canal.

About 12 per cent of the seaborne oil trade and 8 per cent of liquefied natural gas passes through the strait. Last week, oil prices posted their biggest weekly gain since October due to fears about supply disruptions.

"Oil’s geopolitical risk premium – dormant throughout the Israel-Gaza conflict – is reigniting some angst amongst traders as Houthi rebels menace tankers in the Red Sea," analysts at MUFG said.

However, the slowdown in oil demand is expected to continue in 2024, as gross domestic product growth stays below trends in major economies, it said, in addition to a steadily growing electric vehicle industry.

Prices are being weighed down by worries of slow demand growth in the US and China, the world's biggest consumers of crude.

Demand in China, in particular, is expected to slow next year, because the robust post-pandemic activity that helped prop up its economy has begun to fade. The world's biggest importer of crude is projected to consume an additional 500,000 barrels a day in 2024, according to estimates from Bloomberg.

Meanwhile, although US inflation eased in November, it was higher than market expectations, cooling any hopes that the Fed would cut interest rates early next year.

On the supply side, the Opec+ oil producers group will continue output cuts next year as it seeks to better balance the market.

The oil group's members, led by Saudi Arabia and Russia, in November extended their voluntary oil output reductions until the end of the first quarter of 2024 amid concerns over future fuel demand.

The kingdom, the world's largest oil exporter, will keep its voluntary output cut of one million barrels per day until the end of March, while Russia is expected to deepen its cut to 500,000 bpd and extend it until the end of the first quarter of 2024.

In total, the group revealed supply reductions of almost 2.2 million bpd for the first quarter.

Any further moves from Opec+ may result in market movements that may become more volatile, Rania Gule, a market analyst at XS.com, said in a note this week.

"Breaking through either direction in the future will be crucial in determining the true path of the markets," she said.

For 2024, UBS retains a positive outlook, despite a slowdown in oil demand growth, Mr Staunovo said.

"We expect the proactive approach of Opec+ to keep the oil market mostly in balance in 2024."