Q1 2024 Crude Oil Outlook: Oil Spill Searches for a Bottom
Key points for the Oil 2024 outlook
- Oil prices approach technical downtrend support into close of 2023- threat for exhaustion in H1
- Production set to outpace demand next year- supply shifts further to non-OPEC+ producers
- Key risk factors- Rising / expanding geopolitical conflicts, more aggressive OPEC production cuts
Crude Oil 2023 in Review
Concerns over a recession (that never materialized) and decreased global demand weighed on oil prices early in the year. A decline of nearly 46% off the 2022 highs had erased the rally towards 130 with crude prices on the defensive for the entire first-half of 2023.
A technical breakout in July fuelled a rally of more than 49% with WTI reversing sharply in September off downtrend resistance. WTI plunged nearly 29% off the 2023 highs with price trading just above multi-year downtrend support into the close of year. A decline of more than 11% year-to-date was marked by a seven-week decline into December with WTI trading at 71.40 at the time of this report. Heading into 2024, the focus is on a key support hurdle in price and with global production shifting to non-OPEC+ nations, the supply-demand outlook continues to favour of the bears. . . for now.
Oil Production
OPEC+ production cuts were extended this year in an attempt to support oil prices but have been ineffective as of yet in stemming the recent sell-off. At the same time, US oil production has steadily increased since the 2020 plunge with this year marking fresh record highs in output. While production has since pulled off, the International Energy Agency (IEA) outlook for 2024 is projecting another record year of output in the US with increases Brazilian, Guyanese, and Iranian flows further lifting supply. The agency expects that non-OPEC+ nations will once again drive global supply gains in 2024 as OPEC+ continues to deepen voluntary production cuts.
This shift in the global supply remains a central challenge for OPEC and the cartel may take further measures to support oil prices as their market share contracts. Along with the threat of rising geopolitical tensions / aggressions in the Middle East and Asia Pacific (which could impact production / transport), these two threats represent the largest “X” factors for oil prices heading into next year.
Oil Demand
With expectations mounting for a marked slowdown in global growth next year, the demand side remains vulnerable. High interest rates, tighter energy efficiency standards, an expanded push to broaden the electric vehicle fleet (more profound in Europe) and renewed concerns over a slowdown in China have all continued to weigh on global demand.
The US has been the outlier here. Economic activity in the US has continued to exceed expectations with private sector consumption (strong retail sales) largely behind the growth. Further supporting consumers in 2024 is the expectation for the Federal Reserve to begin unwinding its restrictive policy and the combination of lower energy prices, lower rates, and higher growth in the US could help support / put a floor on demand next year.
Technical Outlook
WTI Weekly
Source: TradingView
Oil prices have been trading within the confines of a descending pitchfork extending off the 2022 highs. Price turned just ahead of the upper parallel this year with the pullback settling along the median-line into the close of 2023. Momentum indicators are a tad stretched here with weekly RSI holding multi-year lows- keep an eye on this heading into 2024 as we look to validate a possible exhaustion low in the first half of the year.
Initial support is being tested here at the 1.618% extension of the September decline at 68.78 with a critical support barrier eyed just lower at 62.83-64.60 - a region defined by the 2019 high-week close, the 2023 swing lows, the 1.618% extension of the 2022 decline and the 50% retracement of the 2020 advance. Look for a more meaningful reaction in price there IF reached. Note that losses below this key threshold would threaten a much more significant sell-off with such a scenario exposing initial support objectives at 49.43 and 43.08.
The recent price decline has been trading within the confines of an embedded descending channel extending off the September highs – initial resistance is eyed with the upper parallel / 52-week moving average (currently ~78). Key resistance stands with the 2021 high-week close at 83.28 (note that this level converges on the pitchfork around the April / May timeframe). Ultimately, a breach / close above the 2023 high-week close at 90.79 would be needed to suggest a larger trend reversal is underway.
Bottom Line: Crude prices are approaching a critical support-pivot with the supply / demand imbalance favoring the bears for now. With global production continuing to increase, expectations for an economic slowdown in 2024, and OPEC’s narrowing market share (and impact on prices) put the onus on bulls to find a bottom here. That said, from a technical standpoint, the focus is on a reaction into this key support zone early in the year with the bearish-bias vulnerable while above 62.83. Ultimately, we’re on the lookout signs of downside exhaustion / a possible washout in H1 with a breakout of the 2022 downtrend needed to validate a broader reversal in trend.
Written by Michael Boutros, Sr Technical Strategist with FOREX.com
Follow Michael on X @MBForex
