To say that 2023 was a turbulent year would be an understatement. Unpredictability was the key word as investors reacted swiftly to headlines leading to erratic price movements. On occasions, volatility on WTI, the most important U.S. crude oil benchmark, spiked above 50%. While identifying the main forces that drove the prices of different asset classes last year is a subjective undertaking it’s fair to conclude that the two most salient factors in the focus of oil market participants were inflation and the related changes in the cost of borrowing together with global oil supply.

Comparing the annual returns of equities with that of oil tells the whole story and at the same time it foreshadows what to expect in 2024. In a nutshell, the global economy performed unexpectedly well in 2023, recession has been avoided, for now, and central banks have done an excellent job in keeping inflation under control. The performance of major stock indices is a testament of this. The Nasdaq Composite Index returned 43 cents on the dollar last year (admittedly partly due to the meteoric rise of AI) and the MSCI All-Country Equity Index also performed well by rising 20%. Sound economic backdrop is auspicious for oil demand. Global consumption hit a record high in 2023 and is widely expected to better last year’s act in 2024.

Yet, oil, apart from RBOB, greatly underperformed. Clearly, the supply side of the oil equation was responsible for the below par showing. Despite the best efforts of OPEC+ countries to support the market by cutting production, compliance was poor and whatever void was left there by constraining actual output it was gladly filled by non-OPEC+ producers, chief amongst which was the U.S., pumping as much as 13.3 mbpd of oil towards the end of the year.

Much of the same is anticipated this year – not in terms of returns but concerning driving forces. It is supply/production that will shape the sentiment and, in a way, it will be a boon for the U.S. and WTI. Geopolitical tension in Ukraine and in the Middle East will plausibly last throughout 2024 and the risk of supply disruption will make U.S. crude, which is in abundant supply, an alternative to Russian or Middle East grades potentially supporting the structure of the U.S. crude marker and narrowing the discount to its European peer.