Investors are growing increasingly wary of the volatility in the 2023 year-end crude oil market. On one side, concerns about the security of Middle Eastern shipping lanes have triggered a spike in oil prices. On the other, there's growing speculation about potential disruptions to OPEC+ oil supplies.

Amid this uncertainty, investors are left pondering the future direction of crude oil prices. Compounding the situation are the unexpected events that have led to a surge in shipping stocks, leaving investors to question whether now is an opportune moment to enter the market. In our forthcoming discussion, we will delve into the risks and potential opportunities that currently characterize the crude oil market, aiming to provide a clearer picture for prospective investors.

The challenges in the crude oil market may just begin

The shipping industry is facing significant challenges, and the tensions in the Red Sea may only be the beginning of these issues. The increased geopolitical tensions have led to market risk aversion, which has caused a rapid increase in international oil prices.

As of December 28th, the price of Brent crude oil futures, the global benchmark, has climbed by 9.5% in the prior two weeks, nearing the $80 per barrel mark once again.

The instability in the Middle East has prompted many of the world's leading shipping companies to avoid the quickest maritime path between Asia and Europe – the strategic Red Sea route that includes the Suez Canal. Before the conflict, container shipping, which represents 30% of the global traffic on this route, also transported 9.2 million barrels of oil daily. This volume constituted around 9% of the total global supply in the first half of 2023. Annually, the Suez Canal sees approximately 19,000 vessels transit, carrying goods worth an estimated $1 trillion.

Now shipping firms have been forced to reroute around the Cape of Good Hope, resulting in a journey that is 40% longer, further compounding the industry's challenges.

However, the diversion comes at a cost. Many carriers have quickly adjusted transportation costs. Freight rates on some routes have even surged by 100% to 300%, and the longer the time for ships to detour, the greater the potential for increased transportation costs and shipping inventory.

Toy maker Basic Fun's CEO Jay Foreman said that since October, some shipping costs for Chinese and British freight have more than doubled to around $4,400 per container.

The increased cost is not the only concern. Shipping time has been extended as well. Europe and the United States will also be affected by container shipping in Asian import and export markets. The market believes that if the current situation does not improve, delivery times are expected to be extended by three to four weeks.

Is the Red Sea crisis good news for shipping companies?

Shipping companies around the world are also concerned about the safety of the Red Sea shipping route. According to data from Kuehne + Nagel, as of December 27th, almost 20% of the world's container fleets, equating to 364 large container ships, have changed their routes.

Since December, the stock price of Israeli container shipping company ZIM (NYSE: ZIM) has soared by about 65%. The stock price of Danish shipping giant Maersk (OTCMKTS: AMKBY) has risen by about 20%, while the stock price of Germany's Hapag-Lloyd (XETRA: HLAG-DE), the world's fifth-largest container shipping group, has risen by 28%.

According to analysts from Lloyd's List Intelligence, the longer it takes to divert ships, the higher the shipping costs will be. Ultimately, companies will pass on the additional transportation costs to consumers and earn extra profits.

Looking back at the COVID-19 pandemic, the soaring freight rates are a good example of how supply chain disruptions can benefit shipping companies. Due to strong demand and supply chain bottlenecks, shipping companies and shipowners made record profits during the pandemic. Since then, freight rates have fallen by about 90%. Therefore, supply chain issues under escalating tensions can be a pleasant surprise for shipping companies.

The focus is now on whether this will be a short-term event or a more sustained trend. Michael Aldworth, Executive Vice President of Dextra Shipping Logistics in Switzerland, has stated that the biggest impact may be seen within the next six weeks. The diversion will lead to a shortage of ship capacity and result in a significant increase in short-term transportation price indices.

The sudden surge in shipping fees may also lead to another serious problem - inflation. This will depend on the duration of the event. If the timeline is extended, the supply chain and even consumers will feel inflationary pressures.

Possible oil supply surplus in 2024 may lead to further price decline

The decrease in global demand for crude oil and the increase in production from non-OPEC countries have made it difficult for OPEC+ to support oil prices, potentially leading to a surplus of oil supply in 2024.

The US Energy Information Administration (EIA) reported that crude oil production reached a record high of 13.3 million barrels per day in December, while Brazil and Guyana also broke production records, contributing to the increased supply.

Companies like Rystad Energy and JP Morgan predict that global supply in 2024 is expected to increase by 1.2 to 1.9 million barrels per day, driven primarily by non-OPEC producers.

This prospect has led investors to worry about a potential oversupply in the oil market for 2024.

With the delicate balance of supply and demand, OPEC+'s share of the oil market could fall to 51%, which would be its lowest level since the group's formation.

Some OPEC member countries worry that continued production cuts may just give their competitors a chance to fill in the gap and capture more market share. As a result, African member country Angola announced its withdrawal from OPEC when OPEC further required production cuts in 2024.

On another front, the global economic slowdown is likely to dampen crude oil demand, possibly leading to a drop in prices. The International Energy Agency (IEA) predicts that global oil demand growth will slow down next year and will be half that of this year in 2024, at 1.1 million barrels per day.

The EIA has also lowered its forecast for global benchmark oil prices, predicting that the average price of Brent crude oil in 2024 will hover around $83 per barrel, down 12.05% from its November forecast.

Overall, OPEC+ oil-producing countries face significant challenges in maintaining oil market stability. Investor apprehension regarding the crude oil market, a holdover from 2022, remains. Close monitoring of crude oil supply dynamics and the influence of geopolitical events on the industry's fundamentals is essential going forward.

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