A 40-month low, a 12 percent rebound and a 6 percent retreat. All of that happened in a span of less than two weeks in the international oil markets, which at the moment appears to be offering no sense of direction. The case for bears has not weakened a great deal from a month ago, but the possibility of new war zones emerging in the Middle East is now staring right at us. And that could have consequences for oil prices – albeit, just in the short term.
In the past ten days, three major developments have happened that would have normally caused quite a stir in oil markets. But these are unusual times and the response to major geopolitical, demand and supply risks is somewhat muted. Recall that a big part of the bear rally was blamed on sluggish demand from China, where industrial and retail demand numbers were far from expected. China has now responded with a larger-than-anticipated economic stimulus package, which observes term “historic”. The next month or two will determine how much incremental demand is generated and how long will it be sustained.
And then comes the Israel-Hezbollah war which has escalated to new heights in the past week. The Lebanon risk premium is believed to beat its highest since 2006, and the fears of a wider warzone in the Middle East are looking closer to realization than any point in the last ten years. The actual supply disruption because of Lebanon being in the warzone is minimal, but the risk premium a situation like this adds is nowhere to be seen.
On the other hand, there are reports from close market observers hinting that the Opec leader, Saudi Arabia, has given up of its long-term ambition of Brent oil priced at $100/bbl in the longer-term to balance its budget.
The supply side is also breathing better with Libyan oil production expected to be back on track after settlement between the rival groups. Jury is out on whether Opec Plus, in its next meeting, sticks to its plan of phasing out production cuts or extends – but the patience may well be waning out for some of the smaller partners – and that is where the market bears seemingly drive their confidence from.
Interestingly, Opec continues to be bullish on oil’s long-term outlook, revising the demand growth projections upwards from last year. The cartel c dismisses the idea of oil demand peaking in the near future and goes as far as 2050 with a demand higher than today’s citing population and urbanization growth. Whichever way it swings, the oil seesaw appears far from over – as both sies have just enough going for them.