What Higher Oil Prices in 2024 Could Mean For The Markets?

Gas prices increased by 30% in the third quarter of 2023, with the market size exceeding $2 trillion. The price increase is projected to continue as we move into the new year, with factors like political events and global inflation impacting the prices.

Let us discuss how the rising oil prices will affect the markets in 2024. 

Oil trends and predictions in 2024

Bullish impact in 2024

As oil prices surpassed the anticipated US$90/bbl mark in September 2023, the trajectory of the oil market in 2024 had been positive, prompting a closer examination of economic and political implications. 

While the delayed attainment of the projected price resulted from a sluggish global economy and concerns about China's recovery pace, recent market dynamics have been more supply-driven. Saudi Arabia's and Russia's decision to extend voluntary supply cuts until the end of 2023 played a pivotal role in balancing the market, leading to a projected price tightening in 2024. 

Anticipating continued but slower non-OPEC production growth, particularly from the US, Canada, Brazil, and Guyana, analysts foresee an average Brent price of over US$90/bbl in 2024, with OPEC+ likely maintaining support for the market. The economic impact on global GDP is expected to be modest, but higher oil prices may fuel inflation, potentially influencing central bank decisions on interest rates. The political dimension will also come into focus as the US presidential campaign comes closer, with voters' sentiments possibly swayed by OPEC+'s decisions on oil supply during this period, increasing oil prices further.

High oil prices to result in higher-than-expected inflation 

Elevated oil prices are anticipated to contribute to higher-than-expected inflation in 2024, marking a notable economic impact on the global economy. When oil prices exceed projections, the potential for increased inflation emerges as a significant concern. This development, highlighted in recent reports by Goldman Sachs, suggests a broader economic implication, prompting attention to factors influencing global inflation rates. 

The link between oil prices and inflation underscores the interconnected nature of energy markets and broader economic trends, prompting vigilance among policymakers and economists in monitoring and managing potential inflationary pressures in the coming year.

OPEC+ to bear the bulk of supply cuts

In the coming year, oil prices are poised to experience an upswing as a result of voluntary production cuts undertaken by certain OPEC+ oil producers. While the official OPEC+ statement did not explicitly endorse production cuts, individual countries within the alliance announced voluntary reductions totaling 2.2 million barrels per day for the first quarter of 2024. Leading this initiative is Saudi Arabia, the prominent OPEC member, which is committed to extending its voluntary production cut of 1 million barrels per day until the end of Q1 2024. 

Other nations, including Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman, have also pledged significant production reductions. The compliance of these measures is considered pivotal, with industry experts anticipating a potential rise in crude prices if the pledged cuts are effectively implemented. The move is expected to create a gradual return of removed barrels, maintaining the oil market in deficit during the first half of 2024. Analysts, including those at UBS and Goldman Sachs, foresee a positive impact on oil prices, with expectations that Brent oil prices could be sustained in the $80-$100 range in 2024.

Impact of the oil prices on the market in 2024

Tighter financial conditions and market correction

The surge in oil prices is poised to induce a substantial impact on financial conditions and precipitate a market correction in 2024. As oil prices experience an upward trajectory, the resulting shock is expected to tighten financial conditions across various sectors, such as the energy and automobile sectors. This tightening effect is likely to reverberate through the broader market, prompting a correction as market participants navigate the implications of heightened oil prices. The interconnectedness of oil prices with global economic dynamics underscores the potential for a ripple effect, impacting inflation rates, central bank policies, and investor sentiment.

GDP of all the Fitch 20 economics to decrease

Rising oil prices, potentially spurred by disruptions in the Middle East's oil supply due to conflicts, could have a significant impact on global economic growth, leading to an upswing in inflation, according to Fitch Ratings' Global Economic Outlook (GEO) report. The scenario outlined by Fitch envisions average oil prices of $75 per barrel in 2024, but the projection could be disrupted if oil prices surge to $120 per barrel in 2024 and $100 per barrel in 2025 due to supply constraints arising from conflicts like the Israel-Hamas dispute. 

Simulations using the Oxford Economics Global Economic Model indicate a potential 0.4% reduction in world GDP growth in 2024. The Fitch 20 economies would experience a dampening effect on GDP growth, ranging from 0.1% in Indonesia to 0.9% in Korea in 2024, with implications for financial conditions, business confidence, and financial markets. 

The US could impacted both positively and negatively

The resurgence in the oil market, with Brent surpassing US$90/bbl, is poised to yield both positive and negative impacts on the United States in 2024. The economic and political implications of this price surge are nuanced for the US. 

While US$90/bbl is relatively moderate in historical terms, constituting 60% of the average in 2011, the global economy's reduced oil intensity dampens the sensitivity to crude price fluctuations. The projected 7% average annual price increase in 2024 is expected to have a marginally negative effect on global GDP growth. 

However, higher oil prices may fuel inflation, potentially delaying interest rate cuts. The impact varies for producing and net oil-importing countries, and the US, being both a producer and consumer, experiences a dual effect.

Navigate the 2024 landscape for oil and financial markets 

Overall, in 2024, oil's impact on financial markets will be multifaceted, with potential shocks from Middle East tensions leading to tighter conditions, reduced confidence, and market corrections. This could further depress GDP growth. The risk for traders lies in the heightened susceptibility to supply disruptions, geopolitical uncertainties, and unexpected shifts in global demand, amplifying the challenges associated with trading oil as a commodity.