Oil prices are headed higher later this year amid increasingly bullish fundamentals, even though the market is still very much focused on macroeconomic concerns.
Supplies are tightening, thanks to the cuts from OPEC+ and Saudi Arabia, while demand remains resilient despite underwhelming economic data out of China in the past few weeks.
While market participants are following the bearish macroeconomic sentiment, physical crude supply is tightening, especially of sour grades, the type of oil most of the Middle East pumps and exports.
With the cuts from several large OPEC+ members that began in May, and with the additional unilateral cut from Saudi Arabia this month and next, many of the world’s largest exporters are looking to tighten the market and prop up prices, or “stabilize the market” as they love to say.
“A clear recipe for higher commodity prices”
Fundamentals point to a tighter oil market, according to many analysts and to the oil producers in Texas, who expect rising prices.
“Supply will remain tight this year and demand will reach record levels, a clear recipe for higher commodity prices,” Ed Longanecker, the president of the Texas Independent Producers & Royalty Owners Association, told Houston Chronicle.
According to Longanecker, oil demand in China has been underestimated by the market, while Saudi Arabia could further look to tighten the market if the current cuts fail to move prices higher. Related: An Oil Supply Deficit Is Looming, And Traders Couldn’t Care Less
China and India will lead the 1.8 million barrels per day (bpd) growth in global liquid fuels consumption in 2023, the U.S. Energy Information Administration (EIA) said in its latest Short-Term Energy Outlook earlier this week.
Global oil inventories will transition from inventory builds, on average, during the first half of 2023, to consistent inventory draws until the fourth quarter of 2024, the EIA said, adding that “This transition puts upward pressure on global oil prices.”
In the outlook, the EIA revised up its estimate of U.S. GDP growth this year, to 1.5%, from a previously expected 1.3% last month, partially driven by an updated estimate of real GDP growth in the first quarter of 2023 resulting from more consumer spending and aggregate investment than assumed in last month’s STEO.
The International Energy Agency (IEA) also believes the market will tighten in the second half of the year.
Demand in China and other developing economies is strong even amid sluggish economic growth, the IEA’s Executive Director Fatih Birol told Reuters this week.
“Taken together with the production cuts coming from key producing countries, we still believe that we may see tightness in the market in the second half of this year,” the IEA’s chief added.
Oil Market May Have Finally Turned To Fundamentals
The oil market may have finally started to pay attention to fundamentals, which suggest a tight supply-demand picture in the second half of this year, analysts say.
Traders have focused on the ‘louder’ bearish signals so far and have been waiting for “show me the deficit” to turn more bullish on oil, Standard Chartered analysts wrote in a note this week.
“We think the point when significantly tighter fundamentals should show clearly is now imminent,” Standard Chartered analysts wrote.
The bank expects large oil-supply deficits this quarter, and global demand hitting an all-time high in August.
“The market appears to be finally starting to reflect the tighter fundamentals that we see over the second half of 2023,” ING strategists Warren Patterson and Ewa Manthey wrote on Wednesday, ahead of the U.S. inflation data.
“Obviously, additional cuts announced by Saudi Arabia last week will be helping, while hopes of support measures for China’s economy will be offering some further optimism.”
According to the analysts, “A break above US$80/bbl would see the market finally breaking out of the US$70-80/bbl range that it has been stuck in for more than two months.”
Brent Crude did break above $80 per barrel on Wednesday, exceeding that threshold for the first time since the beginning of May. WTI Crude topped $75 a barrel as prices settled at their highest level in 11 weeks after data showed U.S. inflation fell to 3% in June, versus expectations of 3.1%. The lowest inflation print in over two years was cheered by markets, although analysts say it would not be enough to dissuade the Fed from hiking interest rates – again – later this month.
Nevertheless, the markets turned bullish after the CPI data as more participants now expect fewer additional hikes from the Fed to bring inflation under control.
“Oil prices have been understandably lifted by the US inflation release today as it could be seen to increase the possibility of a soft landing,” Craig Erlam, senior market analyst at OANDA, wrote late on Wednesday.
“The move higher also suggests the latest efforts of Saudi Arabia and Russia are working in tightening the markets and boosting prices after multiple failed efforts.”
By Tsvetana Paraskova for Oilprice.com
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