Having stayed rather calm for four months, international crude oil prices have once again started to look set for another bull run. Brent oil briefly crossed $85/bbl for the first time since November 2023, whereas the WTI breached $80/bbl. Ukraine’s assault on Russian oil refineries may well have played a little part in the market reaction, but one must not read too much into Ukraine aggression as no one is expecting the offensive to sustain.
Russia, on the other hand, has only recently vowed to continue the voluntary production cuts as part of the larger Opec group. More importantly, Russia’s fresh commitment talks clearly of barrels being off market from the production side, instead of the previous export-led cut. The US crude oil stockpile saw a sharp and unexpected dip for last week – as Shale operators have been slow in response.
With the supply equation mostly sorted or at least treading on expected lines, with both the Opec Plus and US taking clearly stated positions, the focus now shifts back to the demand side. Enter China. The West has been trying to look away, but China’s demand resurgence is now gradually maturing and is only going to gain traction, having done the hard yards.
Demand projections from Opec and International Energy Administration (IEA) previously used to be well-aligned, especially on long-term, have deviated to the highest in at least 16 years, as per a Reuters analysis.
The IEA foresees subdued global economic growth, whereas Opec sees a 2.2 million barrels per day growth in oil consumptionin 2024. The IEA on the other hand sees oil demand rising by a more modest 1.2 million bpd – more in line with the EIA’s Short-Term Energy Outlook released a few weeks earlier. The gulf between the two is the widest in a long time. It must be noted that IEA has consistently revised its oil demand outlook upwards, in the last three months.
There is also the expected tailwinds from the increased anticipation of an interest rate reversal in the US. There are diverging views on the “when” and not the “if” part – as inflation is seen to ease in the coming month, as per recent surveys, which could pave the way for a rate cut sooner than the second half of 2024. Barring unforeseen events, what is almost certain is that Opec Plus has the downside sorted and in control and will respond every time prices threaten to go south of $80/bbl. The upside events, on the other hand, are all building up slowly but surely.
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