Energy market volatility seen to ease further in 2024; oil prices expected to rise

VOLATILITY is expected to ease further in the energy market in 2024, as trade flows adapt to global sanctions. And while crude oil prices are expected to rise this year, analysts said there is unlikely to be a repeat of the wild swings seen in 2021 and 2022, despite mounting geopolitical tensions.

Market watchers noted that the global energy market was less volatile in 2023 compared to the preceding two years, when a combination of green initiatives, the Covid-19 pandemic and Russia’s invasion of Ukraine brought on “crazy spikes” in oil and gas prices.

Baldev Bhinder, managing director of energy and commodities law firm Blackstone & Gold, described 2023 as “a relatively subdued year” for commodities.

Some of the factors that had put pressure on commodities during the year include higher interest rates and slowing Chinese growth, Bhinder said. And in 2024, he expects these will continue to help ensure that energy prices do not return to the levels of volatility seen in previous years.

Further, he expects that the commodities sector will also be less volatile in 2024, as new destinations for Russian oil and gas become more embedded in the system.

Similarly, Warren Patterson, the head of commodities strategy at ING, noted that commodity prices – including that of energy – had not strengthened as much as expected in 2023. Pundits had earlier forecast that the Russia-Ukraine war would affect the supply of commodities and drive prices upwards.

“Trade flows have adjusted to sanctions and bans better than expected, which has ensured that supply has held up better than anticipated,” said Patterson.

Tighter oil market in 2024

Despite ongoing geopolitical risks, analysts said the global oil trade in 2023 had better supply than originally expected, which helped to stabilise the price of oil.

There were concerns that the European Union’s ban on Russian oil would reduce its supply and tighten the global oil market, Patterson said. However, large discounts offered have attracted alternative buyers such as India, which has increased its import of Russian oil.

Output cuts by the Organization of the Petroleum Exporting Countries (Opec) and several other non-Opec members, collectively known as Opec+, have also raised oil prices to provide market stability, said Patterson.

Nonetheless, 2023 was seen as a challenging year for oil traders. Bhinder noted that global sanctions, new oil destinations and new trading counterparts brought about new risks when buying and selling oil.

However, Vontobel Asset Management’s portfolio manager of commodities Michel Salden pointed out that the tensions in the Middle East, such as the war in Gaza and Houthi attacks on ships in the Red Sea, had no effect on global oil trade as they did not spill over into a global conflict.

Therefore, the geopolitical risk priced into oil has decreased, Salden said. 

The West Texas Intermediate oil pricing benchmark dropped from mid-US$90 a barrel levels around September 2023 to mid-US$70 price levels in December.

Patterson said that he expects the oil market to tighten in 2024, pushing prices higher to average at US$88 per barrel on the Intercontinental Exchange Brent. 

He added that Saudi Arabia will keep prices trading above their fiscal breakeven level of around US$80 per barrel. 

Salden said that he expects oil to trade in a wider range of between US$70 and US$95 per barrel as ongoing additions of oil supply from countries such as the US, Brazil, Canada and Iran will be able to meet the structural increase in oil demand. 

Lower pressure on gas prices

The gas market has also been “a lot less volatile” in 2023 compared to the year before, said Patterson.

Firstly, Russia had already stopped the bulk of its pipeline gas flows to Europe in 2022, reducing the risk of losing the country’s supply in 2023.

Secondly, Europe started the winter season with a full gas storage, meaning that it had enough to last through the months. The improved supply lowered concerns over gas availability, which helped to reduce price volatility, he said.

“Given that there is a very strong correlation between European gas prices and spot Liquefied Natural Gas (LNG) prices in Asia, weaker prices in Europe have also led to weaker prices in Asia,” said Patterson.

Patterson holds a “fairly neutral view” of European natural gas and the Asian LNG market for 2024.

He said that there is likely to be less upward pressure on European gas prices this year, given that their storage levels are at record levels. This makes their refilling through the 2024 summer season, from June to September, easier.

In addition, there is also a fair amount of new LNG export capacity starting in late 2024, which would help to ease tightness in the global LNG market, said Patterson. 

Nevertheless, he acknowledged that supply shocks or demand spikes over the European winter season towards the end of 2024 could affect the gas market. 

Overall, Patterson believes that sanctions and bans, which have affected the energy markets in recent years, are likely to continue this year in the current geopolitical environment. 

On the other hand, Salden said that it is hard to tell if commodities will have a strong year in 2024. He believes that the global gross domestic product needs to grow by more than 2.6 per cent – which is the Bloomberg consensus forecast for 2024 – to activate a bull market for commodities.