Oil Prices to Remain High Until 2024?

Malaysian Rating Corporation Bhd (MARC Ratings) foresees the Brent oil prices to remain elevated. Brent oil prices are expected to hover around US$85-US$95 (RM406.17-RM453.96) for the remaining weeks of 2023 and within the range of US$80-US$100 (RM382.28 – RM477.85) per barrel in 2024. If more severe and widespread geopolitical conflicts affect the physical supply and transportation, Brent oil prices may surpass US$100 (RM477.85) per barrel.

The worldwide energy landscape is currently experiencing a complex interplay of factors that are shaping the oil market’s near-term price outlook. Those include the ongoing conflicts in Eastern Europe and the Middle East. Others are supply disruptions, expectations of lower global gross domestic product (GDP) growth in 2024, and the persistence of medium-term oil dependency despite evolving environmental policies. The Russia-Ukraine conflict that commenced in February 2022 led to a 25% surge in Brent oil prices, resulting in a sustained period of elevated prices above US$100 (RM477.85) per barrel for four months.

Meanwhile, it said the supply-demand dynamics in the oil market may continue to bolster oil prices. As the world's largest oil importer, China has shown signs of economic recovery, with better-than-expected growth in 3Q2023. This has prompted forecasters to revise their estimates for China's 2023 GDP growth to 5% and above, countering concerns about China’s ongoing property market malaise. China's oil imports rose by 12% to an average of 11.4 million barrels per day (mbpd) in 1H2023, compared to 10.2 mbpd in the same period in 2022. Additionally, a global inventory drawdown occurred in 3Q2023, and demand is expected to remain robust as markets head into the Northern Hemisphere winter.

On the supply side, production cuts are likely to keep total OPEC production below the pre-pandemic 2015-2019 five-year average of 36.2 mbpd, primarily due to Saudi Arabia's and Russia's commitment to extending production quota cuts in favour of higher oil revenue over market share. Furthermore, US trade sanctions against Russia and the possibility of further sanctions against Iran could further constrict both actual and expected supply, intensifying the upward pressure on oil prices.

Conversely, downside risks include the de-escalation of geopolitical risks, weaker-than-expected growth in China and the eurozone, alongside rising production by non-OPEC members and a temporary waiver of US sanctions on Venezuelan oil. Additionally, an unexpected ending of voluntary production cuts by Saudi Arabia, Russia, and other OPEC+ members may also place downward pressure on oil prices. 

Malaysia is now a net exporter of crude oil. Higher oil prices may not significantly affect inflation. The other factor in terms of imported inflation is a net food import which is about RM70-75 billion a year. We need to find practical measures to reduce food imports.

References:

MARC Ratings expects oil prices to remain high until 2024, FMT, 27 October 2023

MARC Press Announcement, 27 October 2023