2023 energy markets were calmer than 2022 - but still not for the faint-of-heart. What will 2024 bring? From crude to biofuels, from the U.S. to Asia, here are five things to watch.
A Wobbling OPEC Floor
OPEC+ loomed large in the oil markets in 2023. Their actions - or inactions - coincided with two out of the three largest daily price moves. In 2024, the call on OPEC production is seen declining as other production rises. OPEC is reporting increases of U.S. production of 1.2 million barrels per day by the end of the year while demand growth is decelerating. With OPEC+ agreed-upon production cuts for the first quarter scheduled to unwind "gradually subject to market conditions" after March, traders will be looking for clues on their plan. Can OPEC agree on enough cuts to support the oil price, or will the market lose the “OPEC floor” that has prevailed through 2023?
El Niño in Natural Gas
With weather driving heating demand and natural gas prices, El Nino is the thing to watch in 2024. Under an El Niño event, the surface water of the eastern and central Pacific Ocean becomes warmer than normal, leading to changes in rainfalls, pressure and wind. According to the December NOAA forecast, there’s a 54% chance that this El Niño event will end up “historically strong,” potentially ranking in the top five on record.
This weather pattern is creating drier-than-average conditions across the northern tier of the U.S. while wetter-than-average conditions are expected for northern Alaska, portions of the West, the southern Plains, Southeast, Gulf Coast and lower mid-Atlantic. 2023 ended with warmer-than-normal temperatures in major natural gas consumption markets. Robust storage and record production has intensified the bearish sentiment in the natural gas market. Will the forecasted “historically strong” El Nino continue to exert downward pressure on Henry Hub natural gas futures prices in 2024?
Spurred by global mandates and government subsidies such as the U.S. Inflation Reduction Act, bioenergy production is booming. U.S. renewable diesel capacity tripled between 2021 and 2023, through new production facilities and the conversion of petroleum-based refineries, and could double again by 2025, reaching 17.4 million tons per year. A similar trend is expected for European Hydrotreated Vegetable Oil (HVO). The rapid growth in bioenergy extends to biodiesel and sustainable aviation fuel, bringing feedstock challenges as producers chase limited supplies of environmentally-friendly waste-oils while also shifting away from unsustainable fuels like palm oil. Bioenergy uniquely links agricultural markets with energy, bringing in both new participants and new supply-demand variables, and also impacts renewable credit markets such as Renewable Identification Numbers (RINS). In 2024, we could see volatility in all three as both feedstock and traditional fuel markets adjust to the rapid growth in bioenergy.
Jet Fuel Rebound
Jet fuel demand has lagged the global demand recovery from COVID, estimated down more than 10% in 2023 from a 2019 baseline. But this is shifting. According to the Official Airline Guide (OAG), overall airline capacity grew by 0.3 billion – an increase of 15.8%, over the winter period of 2023 versus 2022. Strong career growth in Asia from Hong Kong, China and Korea contributed to support this upward trend. This is setting the stage for change in 2024, with jet fuel potentially set for a sharp rebound. Resilience in air travel demand is forecasted at 4.7 billion passengers in 2024, surpassing record levels set in 2019 of 4.5 billion passengers, according to the International Air Transport Association (IATA). As refiners adjust their output to meet growing jet demand, this shift could echo through 2024 diesel, gasoline and crude oil markets.
Brent-Related Pricing Ceding Ground to Rising U.S Inflows
2023 marked a record year for U.S. energy production and exports. With Europe importing more light sweet U.S. crude oil than the North Sea produces, cargos of WTI Midland were added to the Dated Brent assessment in mid-2023. This change links the Brent benchmark to U.S. crude oil and makes explicit the role WTI has in setting global prices - and it is sparking a shift for market participants that has only just begun. European refiners have started pricing supply directly linked to WTI, and producers who have historically linked their oil sales to Brent are investigating the implications of WTI Midland on their revenues. The impact for Asia is not to be overlooked: Despite competition from displaced Russian barrels, the region also imported record levels of U.S. oil.
This trend isn’t limited to crude oil. With exports of U.S. LNG and LPG also setting new highs, the significance of Henry Hub Natural Gas and Mont Belvieu LPG price benchmarks will also be on the rise in 2024.
The five items above are just an excerpt from a long list of shifts in the coming year. Change is a constant in the energy market, creating endless opportunities and challenges for companies, consumers, traders, and investors. No matter your corner of the energy market, 2024 looks set to have something for everyone.
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