Geopolitical tensions in the Middle East have the oil market “on edge” at the start of the new year because of a high risk of potential supply disruptions from the region that accounts for one-third of global seaborne oil trade, the International Energy Agency said in the first “Oil Market Report” of 2024. The IEA’s assessment is that absent actual production losses, the market appears to be well supplied this year in a weaker demand environment.

“At the start of 2024, the risk of global oil supply disruptions from the Middle East conflict remains elevated, particularly for oil flows via the Red Sea and, crucially, the Suez Canal,” the IEA noted in its January 18 report. Strikes by the United States and United Kingdom against the Iran-backed Houthis in Yemen in retaliation for attacks on ships in the Red Sea “have raised concerns that an escalation of the conflict could further disrupt the flow of oil via key trade chokepoints.”

The Houthis have carried out dozens of attacks on ships in the Red Sea since November 2023, ostensibly in support of the Palestinians in Israel’s war against Hamas in Gaza. Oil prices rose above $80 per barrel shortly after retaliatory strikes by the United States and U.K. against Houthi positions in Yemen, before easing as oil flows were not impeded. However, renewed strikes against Houthi targets sent prices back up above $80/bbl on January 24 as the Houthis, who control large parts of northern and western Yemen, vowed to step up their attacks against U.S. and British vessels.

The IEA noted that in 2023, around 10% of the world’s seaborne oil trade, or around 7.2 million barrels per day of crude oil and refined products and 8% of global liquefied natural gas trade sailed through the Red Sea. A number of shipping operators and some oil companies, including Shell, BP, and Equinor of Norway, have been avoiding the Bab el-Mandeb transit chokepoint in favor of the longer voyage around the Cape of Good Hope. This alternative route adds some two weeks to an average journey, which means higher freight and insurance costs and delayed deliveries of goods, all of which could prove inflationary.

Although it cited “a year of subdued global economic growth,” the energy consumer watchdog raised its forecast for oil demand for the year by 180,000 b/d from a month earlier because “the consensus economic outlook has improved somewhat over the last few months in the wake of the recent dovish pivot in central bank policy.” It noted that the reason for the upward revision was that gasoline demand had outpaced its earlier expectations of a structural slowdown in gasoline demand. Yet for 2024, the IEA expects weak performance from gasoline compared with the previous year and has adjusted its demand forecast accordingly.

By the IEA’s calculation, demand for the year will be roughly half the 2023 level as a result of stepped-up energy efficiency measures and electrification of the transportation sector, which will curb oil use, it added in the report. The IEA expects a sharp drop in gasoline consumption compared with 2023, from 720,000 b/d to 150,000 b/d.

The IEA now sees demand for oil growing by 1.2 mb/d in 2024 compared with 2.3 mb/d in 2023, “with the post-Covid recovery all but complete, GDP growth below trend in major economies, and as energy efficiency improvements and electrification of the vehicle fleet curb oil use.”

Supply tightness in the first quarter, due to voluntary production cuts by a handful of producers from the OPEC+ alliance, will give way to a better supplied market with overall supply rising to a record 103.5 mb/d, led by growth in production from the United States, Canada, Brazil, and Guyana, the report stated.

The IEA demand forecast differs from a more optimistic scenario presented by OPEC in its “Monthly Oil Market Report” published a day earlier. While the IEA sees “subdued global economic growth,” OPEC’s assessment is for more robust economic growth of 2.6%, leading to a 2.25 mb/d rise in oil demand. Another key forecast, by the U.S. Energy Information Administration, is closer to the IEA estimate for demand growth. The EIA in its “Short Term Energy Outlook” released January 9 projected demand growth of 1.39 mb/d in 2024.

OPEC did not provide a supply estimate for the full year but its forecast for growth in non-OPEC supply is consistent with that of the IEA. The OPEC report sees non-OPEC liquids production, which includes natural gas liquids, rising by 1.3 mb/d in 2024, slightly below the previous month’s assessment. This leaves the call on OPEC oil, the amount needed to balance the market, at 28.5 mb/d, some 800,000 b/d higher than the 2023 estimate.

What was new in this year’s first monthly report by OPEC is the inclusion for the first time of a forecast for 2025, which the OPEC Secretariat wrote was brought forward “to offer more transparency and support for both producers and consumers” and to provide long-term guidance to the market. In other words, OPEC wants to deprive speculators the opportunity to bet on market direction and influence prices. It noted that bearish hedge funds and money managers reduced their long positions in the tail end of 2023, thereby leading to weakness in the market’s structure.

Saudi Minister of Energy Prince Abdulaziz bin Salman, who represents OPEC’s largest producer and exporter, has often blamed speculators for oil price volatility and has promised to cause them more pain. “Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don’t have to show my cards I’m not a poker player … but I would just tell them watch out,” he told the Qatar Economic Forum organized by Bloomberg in May 2023.

For 2025, OPEC expects demand to “grow by a robust” 1.8 mb/d, sustained by “solid economic activity in China” and demand from non-OECD countries. Non-OECD demand is set to grow by 1.7 mb/d in 2025, mostly from China, while OECD growth is seen rising by just 100,000 b/d.

The OPEC and IEA estimates have been roughly aligned in previous years but have recently diverged sharply, particularly in their long-term demand outlooks. OPEC has lashed out at the IEA for what it considers an alarmist forecast of a peak in demand for all fossil fuels before the end of the decade and has accused the Paris-based OECD energy watchdog of vilifying the oil industry for being “behind the climate crisis.”

The IEA stated in a November 2023 report on the role of the oil and gas industry in the energy transition that oil and gas producers “face pivotal choices about their role in the global energy system amid a worsening climate crisis fuelled in large part by their core products.” The IEA report, released ahead of the COP28 climate summit in Dubai, showed how the industry could take “a more responsible approach and contribute positively to the new energy economy,” adding that producers faced a “moment of truth.”

OPEC Secretary General Haitham al-Ghais responded angrily to the IEA’s assertion and pointed to what he said was the agency’s inconsistent messaging. “It is ironic that the IEA, an agency that has repeatedly shifted its narratives and forecasts on a regular basis in recent years, now addresses the oil and gas industry and says that this is a ‘moment of truth.’ The manner in which the IEA has unfortunately used its social media platforms in recent days to criticize and instruct the oil and gas industry is undiplomatic to say the least. OPEC itself is not an organization that would prescribe to others what they should do.”

The acrimonious exchanges set the stage for a showdown among the IEA, the United Nations, and a number of countries that pushed for tougher language on fossil fuels at COP28 and the oil producing lobby. The outcome at COP28 was a consensus agreement that called for a transition away from fossil fuels rather than an outright phaseout of oil, gas, and coal.

For OPEC+ producers, the primary concern since the market upheavals caused first by the coronavirus pandemic and then the February 2022 Russian invasion of Ukraine has been to balance the market and prevent a price crash that would impact their bottom lines and delay necessary reforms to their oil-dependent economies.

A spike in oil prices to near record levels shortly after the Ukraine crisis was short-lived as a slowdown in the Chinese economy and continued flows of oil from Russia, despite a slew of sanctions and robust growth in U.S. oil production, prompted the OPEC+ countries to institute a series of production cuts beginning in late 2022 to balance the market and support prices.

Eight OPEC+ producers – Russia, Saudi Arabia, the United Arab Emirates, Iraq, Kuwait, Oman, Algeria, and Kazakhstan – agreed on the eve of the COP28 summit to implement additional voluntary cuts totaling 2.2 mb/d from January to March with the option to extend the cuts if necessary.

One of the barometers for the calculations of the OPEC+ countries is the level of global stocks, which can exert a bearish influence on oil prices if they move above historical averages. The IEA said its members, who are required to hold the equivalent of 90 days of import cover at all times, collectively hold stocks of around 4 billion barrels, including 1.2 billion barrels of government stocks that can be released in the event of a supply emergency. “That buffer should help assuage market jitters and angst among governments, industries and energy consumers.”

Adding to bearish sentiment is the growing spare capacity cushion as a result of the OPEC+ cuts, which to date total just under 6 mb/d, including the latest voluntary reductions. This has left the producers with a healthy spare capacity cushion, which has also provided some comfort to the markets, though much of it is held by Saudi Arabia. Iran also has some additional capacity but is constrained by sanctions, while output from Libya, which is not bound by quota restrictions, has held up though has fluctuated in recent weeks due to protests that shut down its largest producing field.

The IEA estimates that overall output from the 18 out of 23 OPEC+ producers subject to quotas was 390,000 b/d below an implied target of 35.46 mb/d in December 2023, leaving the group’s “effective spare capacity, excluding sanctions-hit Iran and Russia, at 5.4 mb/d, with Saudi Arabia accounting for around 60% of the cushion.”

The OPEC+ group, which is led by Saudi Arabia and Russia, will be looking closely at stock levels and how much is drawn down in the first quarter of the year to determine whether the cuts should be extended. The IEA has noted that the OPEC+ supply restrictions “may tip the oil market into a small deficit at the start of the year.”

Yet the OPEC report points to a drawdown of 570,000 b/d in global inventories during the quarter, which would imply that the group might decide to gradually ease the cuts and boost its production to meet its own demand projection both this year and next.

OPEC has had to make a few changes to its roster of members at the start of the year as Angola announced its decision to leave the organization rather than agree to a lower quota. It has been replaced by Brazil, which has joined the OPEC+ alliance, a coup for the organization that accounts for roughly half of total oil supply.

However, it is not expected to be a party to OPEC+ quotas as its state-owned oil and gas company, Petrobras, is a listed company. As a dominant player in the Latin American energy scene, Brasilia will have a voice in the conversation about oil market management.

Brazil is Latin America’s biggest economy and its largest oil producer. It has the largest recoverable ultra-deep oil reserves in the world and is the biggest producer of biofuels after the United States.

OPEC’s 2023 “World Oil Outlook,” which is very bullish on oil demand growth to 2045, sees Brazil’s oil production rising from 3.7 mb/d in 2022 to 4.8 mb/d by 2028. The IEA, in its medium-term outlook “Oil 2023” sees Brazil, then not a member of OPEC+, along with Guyana, Saudi Arabia, the United States, and the UAE boosting supply by a combined 5.1 mb/d between now and 2028.

Brazil is also expected to be one of the largest contributors to additional oil production capacity this decade. On this both OPEC and the IEA agree.