The see-saw in the oil market continues as peak summer season approaches in large demand centers. From the pessimism setting in after Opec’s last month decision of easing cuts – the international oil prices have rebounded to two-month highs on renewed optimism on the demand front and the ever-present geopolitical risk premium reminding everyone of its presence. Brent was seen trading at $86/bbl – a level that many observers believe is the starting point of comfort for the likes of Saudi Arabia and Russia to balance the budget and refrain from making any unilateral cuts.
As indicated earlier in this space, for the Opec Plus alliance to not go out of the way and impose fresh restrictions, oil prices will bounce back to the mid-80s, and it did not take long. The recent gradual surge has come despite a surprising 3.6 million barrels uptick in US crude oil stockpiles. The market seems to have downplayed the momentary surge in inventories, as all eyes are focused on the upcoming peak summer demand season, as jet fuel and motor fuel demand projections are touching all-time highs.
In Europe and the Far East, the inventory pile has gone in the other direction, having witnessed significant drawdowns in the past month. The recent surge in strikes by Russia and Ukraine on each other petroleum storage installations has renewed the war premium. Ongoing escalation in Gaza and the increased tension on the Israel-Lebanon borders, coupled with more strikes on ships in the Red Sea have all contributed to heightened war premium.
The US Fed policy move is also gradually being priced in as participants are now certain of a rate cut before or in the last quarter. China’s demand numbers are throwing mixed signals – but there are no signs of a sizeable demand contraction. The US job data has also reaffirmed grounds for bullish sentiments, as a number of research houses are expected to revise the demand and price projections for Q4 2024 and 2025 upwards, from previous projections.
As much as the US would like to tell the press otherwise, the market balance still remains firm with the Opec Plus alliance – as has been demonstrated successfully time and again by the alliance leaders in the past two years. From what it seems, the oil may not go on an extended bull run – but bears are likely to be kept out should the prices go under the budget-balancing comfort zones of the key producers.
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