Brent oil prices broke out of the $75-$80 range they had been stuck in for months and rallied to a three-month high of over $85 per barrel as the market begins to see evidence of tightening and expects fresh stimulus in China to provide a boost to the economy and oil demand later this year.
Banks and analysts expect large deficits this quarter as supply is shrinking, courtesy of the OPEC+ production and export cuts, while demand is robust despite fears of recessions and an underwhelming Chinese economic performance.
Going forward, inventory drawdowns loom, and additional Chinese economic stimulus is expected. Meanwhile, OPEC+ is unlikely to unwind all the cuts all at once as it is eager to support “the stability of the market,” namely, relatively high oil prices at above $80 per barrel, analysts say.
Recent economic data from the United States have made traders more optimistic that the Fed could pull off a ‘soft landing’—managing to rein in inflation without causing a deep recession, despite raising last week the key interest rate to the highest in 22 years. Market participants are also optimistic that China’s authorities will roll out additional support to the economy after disappointing growth and factory activity so far this year.
Brighter Economic Prospects
“The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Fed chair Jerome Powell said last week after the latest rate hike.
Last month, Goldman Sachs cut its probability that a U.S. recession would start in the next 12 months further, from 25% to 20%, due to the fact that the recent economic data have reinforced the bank’s confidence that “bringing inflation down to an acceptable level will not require a recession,” wrote Jan Hatzius, head of Goldman Sachs Research and the firm’s chief economist.
Following the Fed rate hike on July 26, Goldman’s Hatzius told the Financial Times,
“We believe the Fed is on track for a soft landing.”
In addition, the prospects of China’s oil demand and expected further economic stimulus in the world’s top crude importer have played the biggest role in the oil price rally in July, according to Goldman Sachs. Oil prices ended the month of July with the biggest monthly gain since January 2022 and the strongest July performance in nearly two decades.
Hopes that China will support further its economy, record-high global oil demand, and a substantial drop in supply in July and August have boosted market optimism in recent weeks.
Fundamentals Point To Higher Prices, Too
Oil market fundamentals are signaling bullishness ahead, even more than the most recent interpretation of the near-term prospects for the global economy.
Inventories are falling in the United States and Europe, analysts have told Reuters.
Yet, Chinese inventories have been rising as the world’s top crude oil importer has accelerated stockpiling to the highest rate in three years, taking advantage of cheaper Russian oil and boosting total crude imports in June to the second-highest monthly imports on record.
This month and next, a market deficit will emerge and further grow as demand reaches record highs while supply shrinks, analysts say.
Moreover, the market expects Saudi Arabia, the world’s top crude oil exporter and OPEC+ leader, to extend its 1 million bpd production cut into September, too. The Kingdom is cutting its production by 1 million bpd in July and August, on top of around 500,000 bpd reduction as part of the OPEC+ cuts that began in May. Russia has pledged a 500,000 bpd cut to August oil exports, and signs suggest Russian crude shipments are already falling.
As a result, analysts see hefty inventory drawdowns in the coming months, which are set to support oil prices.
Demand looks stronger than many had expected early in the second quarter.
Oil demand outside China is holding up “far better” than most have feared, while the very aggressive OPEC+ cuts are leading to a deficit on the market, Jeffrey Currie, Goldman Sachs’s global head of commodities research, told CNBC on Monday.
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Inventories in July are looking like they have declined by around 2.2 million bpd, he told CNBC, adding, “That’s big and that just reinforces the potential for more upside.”
The world’s oil demand hit a record high of 102.8 million bpd in July, Goldman’s analysts wrote in a note on Sunday. The bank expects the robust demand to lead to a wider-than-expected deficit of as much as 1.8 million bpd in the second half of 2023, and to 600,000 bpd deficit in 2024. As a result of those deficits, Brent prices could rise to $93 a barrel in the second quarter of 2024, according to Goldman Sachs.
“The market has abandoned its growth pessimism,” the Wall Street bank’s analysts wrote in the note.
Ed Moya, senior market analyst at OANDA, said on the last trading day of July, “Crude prices are finishing a solid month on a high note as demand prospects remain impressive and no one doubts that OPEC+ will keep this market tight.”
“The ace up the sleeve of oil bulls is that the energy market is still awaiting massive stimulus from China that should boost global growth prospects.”
By Tsvetana Paraskova for Oilprice.com
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