Brent oil prices have found a new higher floor at above $80 per barrel in recent days as the market starts to believe in fundamentals while looking out for signs of a recession.
As supply is tightening due to the OPEC+ cuts and a slowdown in U.S. shale production growth, demand is robust and likely to further strengthen during the third quarter with peak driving season and strong consumption in the two leading Asian crude importers, China and India, analysts say.
That’s not to say that fears of recessions aren’t influencing the market. On the contrary, participants continue to weigh the likelihood of a material downturn in the U.S. and Europe against expectations of a tightening market and large supply deficits through the end of the year.
But the evidence of tight supply-demand balances that the market needed may finally be here.
“Serious Problems With Supply Keeping Up”
While demand has already returned to pre-pandemic levels and set for a record annual average this year, supply is having trouble keeping up, setting the stage for higher oil prices in the second half of this year, according to Joseph McMonigle, Secretary General of International Energy Forum (IEF), the world’s largest international organization of energy ministers.
Demand is rising, and the market will see massive inventory draws beginning this quarter and lasting through next year, McMonigle told CNBC in an interview this weekend.
“So, for the second half of this year, we’re going to have serious problems with supply keeping up, and as a result, you’re going to see prices respond to that,” McMonigle told CNBC on the sidelines of a G20 energy ministers meeting in India.
China and India, the world’s largest and third-largest oil importers, respectively, will be the key drivers of rising oil demand, he added.
Combined, India and China are expected to account for 2 million barrels per day (bpd) of demand increase in the second half of this year, according to McMonigle.
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“We’re going to see much more steep decreases in inventory, which will be a signal to the market that demand is definitely picking up. So you’re going to see prices respond to that,” he told CNBC.
In case of demand exceeding expectations and tightening the market too much, OPEC+ producers could move to unwind some of the current cuts, the IEF secretary general noted.
Demand Rising
Global oil demand jumped by more than 3 million bpd in May compared to April, nearing the record demand level seen in March this year, the IEF said earlier this month, citing data by the Joint Organizations Data Initiative (JODI). China’s total oil product demand hit 17.37 million bpd in May, the JODI data showed. This was an increase of 1.7 million bpd compared to April and the second-highest level ever reported in JODI.
The U.S. Energy Information Administration (EIA) also forecasts inventory drawdowns to start this quarter and continue until the fourth quarter of 2024, putting upward pressure on oil prices. Global oil inventories increased by an average of 600,000 bpd in the first half of 2023, but they will fall by an average of 700,000 bpd in the second half, the EIA said in its July Short-Term Energy Outlook (STEO).
Goldman Sachs expects oil prices to rise to $86 per barrel at year-end, as record-high oil demand and lowered supply will lead to a large market deficit.
“We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high,” Daan Struyven, head of oil research at Goldman Sachs, told CNBC on Monday.
Recession Odds Decline
Goldman’s analysts are also more optimistic that the U.S. could avoid a recession, fears of which have kept oil prices weighed down and below $80 per barrel in the second quarter of the year.
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Last week, Goldman Sachs cut its probability that a U.S. recession will 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.
The Fed is largely expected to raise interest rates at the July 26 meeting, Goldman and many other analysts concur. But many believe this could be the end of the money-tightening cycle. The oil market will be closely watching the Fed decision—and most of all, the comments by Fed Chair Jerome Powell accompanying the decision—for clues about the economy.
“Crude prices are tentatively breaking out as expectations remain for the oil market to remain tight despite all global weakness that is emerging,” Ed Moya, senior market analyst at OANDA, said on Monday as oil prices rallied to a three-month high and Brent topped $82 per barrel.
If the U.S. succeeds in avoiding a recession and China increases economic stimulus to help a rebound in the second half of 2023, oil market participants will focus more on fundamentals, which have started to point to a supply deficit and higher prices later this year.
By Tsvetana Paraskova for Oilprice.com
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