Our 2024 oil price forecast is cautiously optimistic. Yet many investors are anxious and unsettled by persistent Red Sea conflicts and the pivotal OPEC+ announcement on production cuts in early March. How these events unfold could sway oil prices significantly in either direction. Moreover, higher oil prices could amplify inflationary pressures from higher shipping costs, potentially delaying Federal Reserve interest rate cuts.

A critical factor is whether OPEC+ will opt to maintain its current output levels, a decision expected by the first week of March. Last October, the group committed to cut 7.2 million barrels per day (mbd). PIMCO estimates this equals nearly 7% of global demand, with a third of this reduction – about 2.2 mbd – being “voluntary.”

Failure to extend these cuts could dampen market sentiment and suggest OPEC+ might step back from a policy that has underpinned price stability. PIMCO estimates the reductions have resulted in about 4.5 mbd of spare production capacity, the highest in nearly a quarter-century. In a scenario where 2.2 mbd reenters the market in April without other adjustments, our model predicts crude oil could drop by $20, falling into the mid $60s per barrel of crude oil (bbl).^Footnote1

Despite market consensus leaning toward an extension of the voluntary cuts into the second quarter of 2024, history suggests such measures are not permanent. This introduces a considerable downside risk should OPEC+’s strategy shift.

Geopolitical tensions and supply risks

Conversely, ongoing Red Sea tensions could drive prices up. Iran-backed Houthi militants in Yemen have disrupted global trade by targeting vessels in the Bab el-Mandeb Strait and the Red Sea, leading to retaliatory actions by the U.S. and others.

This has escalated shipping costs due to longer travel times and higher insurance premiums. Europe – heavily reliant on Asian imports following the imposition of sanctions on Russia following its 2022 invasion of Ukraine – has borne the brunt of these logistical challenges, incurring significant additional costs for refined petroleum products. However, global supplies remain unaffected for now, with the increased costs offset by reduced demand due to warmer weather.

Yet, the persistent tensions underscore the importance of paying attention to supply risks. Our December post, “COP28: Climate Issues Share Center Stage With Oil and Gas,” predicted tighter sanctions on Iran, a forecast borne out by additional sanctions and strikes on Iran’s proxy militias.

Iran’s potential response remains uncertain, but its aggressive actions following the reimposition of sanctions in 2019 – striking Saudi energy assets and declaring, in essence, If we can’t sell our oil, nobody can – serve as a stark reminder. Although oil prices surged after these attacks, Saudi Arabia’s swift production recovery quickly reversed this spike.

While diplomatic relations between Iran and Saudi have improved, Iran’s ability to disrupt the Strait of Hormuz is not in doubt. As seen in the Red Sea, land-based drones and missiles can wreak havoc and be difficult to stop. In the first half of 2023, the Strait of Hormuz was a conduit for about 20% of global oil and natural gas supplies, the U.S. Energy Information Administration estimated in December – and beyond the east-west pipelines in Saudi Arabia, there is limited ability to reroute supplies should events get out of hand. The nature and duration of any supply disruption would impact the ultimate price rise, but oil traders would quickly react to any perceived risks and a spike of $20/bbl would not be unreasonable.

The geopolitical quagmire and oil markets

In summary, while our baseline outlook for 2024 oil prices is supportive, the uncertain trajectory of OPEC+ production decisions and regional conflicts suggest a choppy road ahead for the market.

For investors, recent declines in inflation readings, particularly for manufactured goods, have been welcomed, leading to stabilization in fixed income markets and increases in equity valuations. However, U.S. consumer price inflation rose a faster-than-expected 3.1% in January compared with a year earlier, according to the Bureau of Labor Statistics. Rising shipping costs or an energy supply shock would add inflationary pressure, potentially further complicating the timing of rate cuts by Fed .