It is not quite the panic of 2022, yet, but the international oil market has continued to heat up. Now nearing a six-month high, both Brent and WTI have gained over 8 percent in little over a month. For the first time in many a month, all variables are supporting a sustained bull rally, unlike recent past when demand side concerns kept supply outage risks at a minimum.
US crude oil inventories, US industrial growth, China demand projections, Opec’s unflinching resolve, escalation in the Middle East, Ukraine-Russia war showing no signs of slowing down – every single factor is screaming a tight market in the foreseeable future. Opec Plus has once again indicated continuation of its restricted production quotas and felt no immediate need for change. And that makes all the sense too – as the desired outcome of elevated prices without having to further deepen the production cuts is being achieved, at least for now.
The latest push has come right around the Ukrainian attack on Russian oil refineries, but the bigger geopolitical risk is brewing elsewhere. While Ukraine has intensified attacks on Russia’s oil assets – the impact on ground is not substantial, as the loss thus far is minuscule in proportion to Russia’s massive share in global production and trade – despite sanctions and voluntary production cuts.
The bigger worry in the past week has arisen after Israel’s attack on Iranian embassy in Damascus that resulted in killing of top Iranian commanders. An Iranian response in kind is unlikely but not out of the equation as Tehran weights on retaliation options. An unsettled Middle East with more potential war zones is what seems to have inflated the geopolitical risk premium to oil – as Yemen Houthis are already ensuring a large chunk of oil gets transported via a much longer route.
On the demand side, China seems to have grown from strength to strength, with industrial production surpassing earlier estimates, and projected to stay the course for 2024. While the US IEA and Opec continue to have extreme divergence on global oil demand growth for 2024, there are more chances of the IEA revising its demand projections upwards in its upcoming short-term energy outlook report than Opec, in light of strong high-frequency numbers emerging in the world’s demand engines : US and China.
On the other side, while the US Fed has so far stuck with the monetary stance – a cycle of rate cuts is looking closer than ever. A recent survey indicates there could be as many as three rate cuts in 2024, although the cuts may still be cautious. All eyes are now on the USA more than Opec –as interest rate call, stockpile data, and shale response will set the tone for the price direction of the next few weeks.
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