The Brent oil and gas field is located off the north coast of Scotland, roughly halfway between Norway and the Shetland Islands. Extraction of these hugely important energy sources began in 1976, five years after the area was first discovered. Operated by oil multi Shell along with Esso, the field reached peak output in 1982, when more than half a million barrels of oil equivalent were pumped out each day. The oil and gas field is now history, production having ceased in July 2021. The name “Brent” has remained, however, serving as a now indispensable reference on the commodities markets for the oil obtained from the British and Norwegian North Sea. Futures contracts and options on Brent are traded on the Intercontinental Exchange (ICE). Last year almost 270 million Brent futures – more than ever before – were transacted on the platform. That means the trading volume has more than doubled within the space of 12 years (see graph).
One of the strengths of the North Sea type is that it is extracted at sea, as this allows the light and sweet crude to be transported to all corners of the world not only via pipelines, but also by means of tankers. Although the US counterpart, Western Texas Intermediate (WTI), is also sourced off the US coast, over the last few years oil extracted from shale has gained increasingly in significance. Neither the situation in the North Sea nor the state of affairs in the Texas shale basin or the Gulf of Mexico are the primary cause of the latest movement in the price of the two most important reference contracts. Rather, it is a mix of geopolitics and the economy that is determining events on the various marketplaces.
Since the Hamas attacks on Israel, the situation in the Middle East has been stirring fears of possible supply bottlenecks. Tensions have risen further in the wake of the Houthi attacks on shipping in the Red Sea and the retaliatory strikes by the United States and Great Britain on rebel positions in Yemen. The spectre frightening oil markets is a blockade by Iran of the Strait of Hormuz, a narrow strip of water connecting the Persian Gulf to the Gulf of Oman. Around one fifth of global oil production passes through this logistics “eye of the needle” each day. It is difficult to say whether and to what extent the markets have already factored a risk premium for such scenarios into oil prices. Although there has been no real price shock so far, Brent is still trying to escape the short-term downward trend.
Fundamentally, the general macroeconomic climate is critically important for the prospects of the raw material. In many places energy demand declines with economic activity. Demand for oil did not rise as sharply last year as originally expected. The global market was thus adequately supplied, despite the oil-producing countries in the OPEC+ group having reduced their output. To a certain extent the cartel’s strategy was counteracted by the record high in production in the USA. According to the U.S. Energy Information Administration (EIA), the most important energy source could nevertheless become scarcer in the short term. In its current outlook, it calculates that global oil demand will exceed 102 million barrels per day for the first time in the 1st quarter of 2024. On the production side, the agency anticipates a drop in volume of some 800,000 barrels. The EIA reckons that by as early as April the global market will have returned to near equilibrium, where it is set to remain into the year 2025 (see graph).
In the past it has been shown time and again that such forecasts should be treated with caution. In particular, the geopolitical situation already outlined could quickly throw a spanner in the works of the EIA. The same would apply if OPEC+ countries were to cut their capacities once again. And that is not to mention the USA: as the presidential election draws closer, calls for a rapid replenishment of strategic oil reserves – they had shrunk to a 40year low in 2023 – could grow louder. The spread of price forecasts reflects the wide array of possible influencing factors. On 10 January Reuters conducted a survey of 30 research firms. For 2024, the expected average price quoted for Brent ranges from USD 74 to USD 93. The news agency puts the mean from its survey at USD 82.50, a premium of just under 5% on the current level.
Source: Intercontinental Exchange (ICE); as at: January 2024. Past performance is not a reliable indicator of future performance.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2024.e = expected