Price Action
West Texas Intermediate crude for December delivery rose 0.3% to $77.37 a barrel on the New York Mercantile Exchange. January Brent crude, the global benchmark, was up 0.3% at $81.63 a barrel on ICE Futures Europe.
Market Drivers
The Organization of the Petroleum Exporting Countries (OPEC) has increased its forecast for 2023 growth in oil demand to 2.5 million barrels a day (mbd), up from the previous projection of 2.4 mbd in October. OPEC’s November report explains that revisions to demand data from members of the Organization for Economic Cooperation and Development (OECD) have offset each other, while positive revisions for China have balanced out negative revisions in non-OECD countries.
OPEC expects oil demand in 2024 to grow by 2.2 mbd, maintaining their previous assessment. In terms of supply, OPEC has revised its forecast for 2023 non-OPEC growth to 1.8 mbd from 1.7 mbd, and anticipates a 1.4 mbd growth in non-OPEC liquids supply for 2024, which remains unchanged from the October estimate.
Crude Oil Prices Drop Amidst Concerns of Regional Conflict
Crude oil prices, represented by Brent and WTI, experienced a significant drop of over 4% last week, marking their third consecutive weekly decline. This decline brought the prices back to levels last observed in mid-July. The recent decrease in oil prices comes as the risk premium, which was initially built into the market following the Oct. 7 Hamas attack on southern Israel, has been largely erased. Despite this development, concerns remain about the potential for a broader regional conflict that could disrupt the flow of crude oil from the Middle East.
Observers have noted that the implied volatility of call and put options on the ICE Brent crude oil price has decreased significantly. Commodities economist Edward Gardner from Capital Economics stated that investors are exhibiting greater concern for downside risks to oil prices rather than upside potential. Furthermore, the premium held by front-month oil contracts over second-month contracts has narrowed or disappeared. This indicates that investors are becoming less anxious about potential supply disruptions.
Looking ahead, investors will be closely watching the upcoming meeting of OPEC+ ministers on November 26. This meeting may set limitations that prevent further declines in oil prices. Gardner commented that while the oil market is expected to remain finely balanced in the coming months, there is a risk that OPEC+ may decide to further reduce supply if prices fall even more. Capital Economics maintains its forecast for Brent crude oil prices to reach $85 per barrel by the end of this year and in 2024.
