28 March 2024

The oil price is a key macroeconomic metric. This price determines oil industry investment, underpins industrial and consumer goods, and represents the predominant fuel of transportation. Higher oil prices have historically been associated with a greater demand for helicopters and we shall explore the reasons behind this in a future Insight piece. 

This week we explore the current state and direction of oil markets and prices specifically:

1) 2024: The Year of the Soft Landing?

Changes in oil prices are usually explained by changes to the supply and demand balance. Key demand-side considerations include global economic growth and energy mix/usage, whilst key supply side considerations include investment in new production capacity and co-ordinated measures to manage output. 

At the tail-end of 2023, many industry commentators were forecasting that high interest rates, used as a measure to combat post-Covid inflation, would harm economic growth and lead to recession in many countries, with a ‘soft-landing’ being offered as a best-case scenario. 

As we approach the end of Q1 2024 it is looking increasingly likely that many countries will avoid recession, whilst starting to see interest rates ease as the rate of inflation slows; the US economy, in particular, perhaps being the best example.

The headline projections for economic growth from the IMF in January 2024 were perhaps a little underwhelming with global growth rates of 3.1% and 3.2% forecast for 2024 and 2025 respectively, versus 3.1% in 2023.  

However, upon closer inspection, the data shows the continued importance of Emerging and Developing Economies; they are forecast by the IMF to grow at 4.1% in 2024 versus 1.5% for Advanced Economies. The chart alongside shows the IMF forecasts for the G7 and selected other countries. The growth for China and India is particularly significant given that these two countries are home to over a third of the world’s population, and account for one fifth of the world’s oil consumption (link).

Key takeaway: Oil prices are unlikely to come under negative pressure from the effects of recession on oil demand. General energy security and independence goals, coupled with demand from emerging economies is likely to support prices.

2) OPEC & Capital Discipline 

In recent history, oil price crashes have been largely driven by demand shocks such as the Global Financial Crisis (GFC) of 2008 and the Covid pandemic of 2019/20. The 2014 oil price crash was different as it was driven by an excess in supply caused by aggressive shale drilling in the USA which over the last decade saw US oil production increase from 5/mbpd (millions of barrels per day) to over 12/mbpd. The USA has been the world’s largest oil producer for the last six years, overtaking both Russia and Saudi Arabia in 2023 where it set a new production record of an average of 12.9/mbpd – more than any other country has ever achieved. 

It has taken time for the world to adjust, but adjust it has.

A low oil price environment hurt key oil exporting nations including the members of OPEC (and now OPEC+ with the addition of selected other countries) and since 2014 they have been much more pro-active in curtailing output in an effort to support oil prices. The days of members engaging in ‘quota cheating’ (producing in excess of agreed quotas) are long gone and we now see the opposite behaviour in the market, with Saudi Arabia voluntarily announcing a production cut of 1/mbpd earlier this month.  

Oil companies have also been far more restrained in committing to new projects with overall global upstream capex in 2024 projected by Evercore to reach $500bn, a long way shy of the 2014 peak which saw capex exceed $700bn. Oil majors have profited well from managing costs and being cautious with commitments to new capacity.  

Whilst the average motorist might bemoan the impact of ‘high’ oil prices as they fill their cars, the reality is that current oil prices are not ‘high’ in the context of the last two decades. Neither does there appear to be much of a ‘geo-political premium’ with current oil prices slightly lower than they were before the invasion of Ukraine. Even relative to the last ten years, oil prices are only slightly higher than the inflation adjusted average of $72/bbl.

Key takeaway: For now, at least, it appears oil producers have collectively learnt and understood that “drill, baby, drill!” does not lead to good outcomes overall for oil producers. ‘Capital discipline’ is helping to keep oil supply under control and to support prices at a level where they are high enough to ensure good returns for producers but not so high that they tip consumers into recession.

3) What is the market expecting?

Structural analysis from the US Energy Information Administration shows a tightening gap between supply and demand through 2024 and into 2025, which according to Bloomberg and MUFG Research will offer support for oil price levels of at least $80/bbl. 

As they note: “We believe that [global oil markets] will remain supported in 2024, led by tight micro fundamentals (moderate deficits), OPEC+ driven carry and effective hedging value against negative geopolitical supply shocks. While higher non-OPEC+ supply or lower GDP are downside risks to prices, we estimate that Brent would remain close to USD80/b unless OPEC+ became less assertive.”

The collective expectation at the start of 2023 from the EIA and a basket of investment banks we have selected and shown below was for Brent oil prices to average $94/bbl. The outcome for 2023 was an average of $84/bbl – 11% lower than expected. 

The collective expectation at the start of 2024 for the year from the same institutions is $84/bbl – a little softer than expectations last year but this would still represent a decent outcome for the offshore business generally. At these oil price levels new multi-billion-dollar investments offshore can pay back in as little as 3-5 years.

Key takeaway: Oil demand is expected to outstrip supply through 2024. Whilst there may be some price softening in early 2024 relative to the strong 2023, even at current prices of ~$80/bbl, we should still see robust levels of commitments to new offshore projects.

LCI Analytics will come back to this topic soon and will assess how these oil market trends will impact on the demand for helicopters. In addition, we shall explore growing ESG and sustainability dynamics and how they are beginning to affect the sentiment of this globally influential marketplace.

Please keep in touch with our Insight series to see the key analytics that we can offer.