Brent Price Outlook

[Marcelo Chaplin]

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Amy Chronis is a senior partner and the immediate past vice chair, US Energy & Chemicals leader and Houston Managing Partner for Deloitte. Chronis has more than 30 years of experience in serving public and private enterprises from emerging businesses to Fortune 500 companies in the oil and gas, chemicals, technology, and manufacturing industries.

Despite these disruptions, global oil demand remains on track to grow by 2.3 mbpd in 2023 and cross the 100 mbpd mark for the first time in history.3 At a global level, electric vehicle (EV) sales grew by over 35% in 2023, with one in seven cars sold being an EV.4 This simultaneous growth in both petroleum-powered vehicles and EVs reflects regional disparities in demand structure, infrastructure readiness, technology adoption, regulatory policies, and socioeconomic considerations.

The industry is expected to have a solid start in 2024 due in part to its strong financial position and high oil prices, barring further deterioration in the macroeconomic environment. This strength of the industry will likely enable it to finance both investments and dividends, and thus support its disciplined capital program and shareholder-focused strategy. The global upstream industry, for example, is projected to maintain its 2023 hydrocarbon investment level of about US$580 billion (an increase of 11% year over year) and generate over US$800 billion in free cash flows in 2024.5

However, this continued financial strength of the industry is likely to raise expectations of investors, regulators, and other stakeholders, who may anticipate further progress in emissions reduction, augmented investments in low-carbon energies, and amplified returns for shareholders. These expectations may serve as a driving force, spurring companies to focus even further on both emission reduction and economic performance. The 2024 oil and gas industry outlook explores five trends and industry drivers that are expected to play an important role in shaping the strategies and priorities of O&G companies in the upcoming year:

The dynamics steering the clean energy advancements of O&G companies are complex, as each company should weigh their own set of benefits and risks of investing in green initiatives. Progress at the company level and subsequent capital allocation are often influenced by internal as well as external considerations.

2. External considerations: Since 2021, many new clean energy policies have been adopted or proposed worldwide, including the Infrastructure Investment and Jobs Act and the Inflation Reduction Act in the United States; and the proposed European REPowerEU Plan and the proposed Net-Zero Industry Act in the European Union. Similarly, renewable energy targets in Asia-Pacific and significant renewable energy auctions in South America seek to spur clean energy adoption.12 However, the effective execution of these policies or progression of these proposals remains important for attracting capital and reducing investment risks. For example:

Global clean energy investments crossed the US$1 trillion milestone in 2022, propelled by favorable policies and open trade of energy resources and critical minerals.15 This growth in renewable energy is driving a surge in demand for critical minerals, with lithium demand tripling between 2017 and 2022, and cobalt and nickel demand increasing by 70% and 40%, respectively, during the same period.16 However, as investments in renewables pick up pace, especially against the backdrop of a shifting geopolitical landscape, they not only heighten the reliance on these minerals but also underscore the urgency to strengthen their ownership and supply chains. This imperative may be particularly notable for nations with ambitious clean energy targets and a substantial dependence on imports (figure 3).

Securing feedstock supply is crucial for the O&G business model, and it has often involved backward integration or long-term contracts. However, with renewables, whose returns are relatively modest, global O&G companies face additional challenges relating to mineral production and processing concentration. Indonesia dominates nickel mining and processing. China, on the other hand, dominates the market in graphite (100%), lithium and cobalt (65% to 75%), and rare earth elements (90%) processing (figure 3).17 To strengthen their control over the supply chain, nearly 80% of surveyed O&G executives are considering securing clean energy manufacturing and critical mineral rights, thereby leveraging their expertise in subsurface and reservoir management and their regulatory knowledge.18 In addition, participating in the clean energy supply chain can allow companies to continue participating in commodity markets, instead of taking on additional risks in end markets.

Fostering capabilities in critical minerals, especially lithium, can present O&G companies with synergistic opportunities. However, to capitalize on these emerging opportunities, the companies need to develop mitigation strategies for certain risks:

The Deloitte AI Institute defines generative AI as a subset of artificial intelligence in which machines create new content in the form of text, code, voice, images, videos, processes, and even the 3D structure of proteins."38 The value of generative AI for the O&G industry can be categorized into four dimensions: from immediate cost reduction, to enhanced process efficiency, to the creation of new revenue streams, ultimately culminating in the acceleration of innovation-led change within the company (figure 5).

Harnessing value across these dimensions using generative AI can enhance operational sustainability for O&G companies through carbon emissions monitoring, energy efficiency optimization, and waste reduction while also predicting emission intensities across their supply chain. The industry can likely benefit from proactively addressing cybersecurity challenges, adapting to evolving regulations, and ensuring data quality when integrating AI technology.

Global oil demand is projected to slow down in the long term, rising annually by only 0.4 mbpd until 2027, compared to 1.6 mbpd until 2023. Meanwhile global biofuels demand is projected to rise by 44% between 2022 and 2027 as it increasingly substitutes for petroleum-based products.43 In addition, the share of EVs in global car sales is expected to range between 62% and 86% by 2030.44 In response, many global automakers are reorienting to electrify large portions of their product portfolios.

The gap between rising low-carbon fuel alternatives and slowing but still positive oil demand expansion can offer a window for refiners to plan their transition without risking the disruption of financial stability. Therefore, refiners could play a transformative role by crafting strategic pathways and cultivating new capabilities within the following distinctive realms:

Given the healthy cash flows, robust financial health, sustained capital discipline, and rapid technological progress in the industry, O&G companies seem relatively well positioned to increase focus on the energy transition in 2024. This may entail concerted efforts to curtail emissions from hydrocarbons while augmenting investments in scalable and economical low-carbon solutions. In 2024, O&G companies should consider the following in their key decision-making:

Amy Chronis, Kate Hardin, John England, Teresa Thomas, and Anshu Mittal, From divergence to convergence: Examining the energy transition expectations of oil and gas executives and investors, Deloitte Center for Energy and Industrials, October 2023.

Access more insights for the aerospace and defense, chemicals and specialty materials, engineering and construction, industrial manufacturing, mining and metals, oil and gas, power and utilities, and renewable energy sectors.

Crude oil prices lost over 15% in early Q2, as macroeconomic developments have been failing to provide meaningful support for oil, which has its own problems to deal with (for example, Russia overproducing in April despite commitments to slash production along with other OPEC+ members).

At the beginning of 2024, the crude oil forecast was that Brent would trade above $90/bbl in the second half of the year. Oil prices have already traded above that level several times this year, and analysts still forecast oil prices to briefly trade above that in the third quarter. However, any rally here is unlikely to be sustained.

When considering anticipated global monetary policy developments, a rebound in demand appears unlikely. Undoubtedly, oil prices have been remarkably resilient in the face of disappointment stemming from the revaluation of the potential decline in interest rates in the US and, therefore, globally. Remember that the markets anticipated several rate cuts by the beginning of 2024. Although inflation is heading in the correct direction, it chose not to cooperate and hasn't let up as planned. Even still, by year's end, investors will likely be relieved that the Federal Reserve will only be making one cut.

Most of the cuts will be prolonged until 2025 in a complicated agreement reached earlier in June, but a component called "voluntary" will begin to be phased out starting in October. For instance, Saudi Arabia might increase its daily output from nine million to ten million barrels by the end of the next year. That's an increase, albeit a small one compared to the roughly twelve million barrels the nation might theoretically generate.

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