Trading Signals 05/02 – 09/02
Oil: A Review of Early 2024
Oil prices have been under pressure. Initially, investors saw a rise from the start of the year, followed by a sharp decline towards the end of January, influenced by the strengthening of the US dollar and potential easing of tensions in the Middle East. What’s happening in the oil market and what are the experts’ predictions for the end of the year?
On a Seesaw
The mood in the oil market shifted as early as the end of October last year. Before that, prices of “black gold” had been showing steady growth. Analysts were making predictions about the return to $100 and even $150 per barrel for Brent crude, as record demand for fuel and reduced supplies from Saudi Arabia were depleting global stocks. The risk of a sharp price spike was exacerbated by the conflict in the Middle East.
However, the explosive growth in prices did not occur, as weak economic signals soon emerged from China, the US, and Europe. Moreover, the feared disruptions in oil supplies from the Middle East, linked to the escalation of the Palestinian-Israeli conflict, did not materialize. As a result, the premium for geopolitical risk shifted to a noticeable correction. Over the last three weeks, Brent quotes have lost about 8% in value.
The market failed to be significantly invigorated by the OPEC report released the day before, which indicated a certain shortage of raw materials.
Evidently, the focus on supply and demand issues is currently causing panic in the oil market. This is especially so as, according to expert forecasts, another factor soon may add pressure on oil prices.
Iraq is hoping to reach an agreement this week with the Kurdistan Regional Government (KRG) and foreign oil companies to resume oil production in the Kurdish region’s oil fields. These are factors related to the supply of oil in the market. Additionally, the demand situation is also significant. The factor of uncertain economic prospects in the US, China, and the European Union also plays a crucial role.
The US Energy Information Administration (EIA) announced last week that crude oil production in the States this year will grow slightly less than previously expected, while demand will fall. Next year, gasoline consumption per capita in the US may drop to the lowest level in the last two decades, according to the EIA report. Attention is also on China, where high hopes were placed for demand growth this year. Oil import volumes in the PRC remain consistently high. However, consumer prices in China in October fell to a multi-year low, raising doubts about the effectiveness of the country’s economic recovery. Additionally, Chinese oil refineries have requested reductions in crude supplies from Saudi Arabia in December.
Leading OPEC+ countries have extended their production restrictions into early 2024. For this reason, Brent quotes are likely to find support around $76-77 per barrel, from where a new wave of price growth can be expected.
The optimal price level, from the perspective of key oil-producing countries, would be $80-90 per barrel for Brent, and such indicators are achievable.
OPEC+ may eventually opt to extend voluntary cutbacks, and China, implementing a series of budgetary economic stimulus measures, may increase GDP growth rates. The positions of commodities can also improve in case of signals of easing monetary policy by the world’s central banks. With an improved market situation, Brent quotes can quickly rebound closer to $90 per barrel and remain at these levels for the rest of the year.
At the same time, the conflict between Israel and Palestine cannot be ignored. This topic is still on the agenda for investors. They must continue to monitor media headlines, as any changes in the Middle East can cause a significant spike in oil prices.
Recall that at the end of October 2023, the World Bank admitted that Brent prices could rise to $157 per barrel if other countries were drawn into the war between HAMAS and Israel. And the international rating agency Fitch released a forecast indicating that due to supply constraints arising from the Israel-HAMAS conflict and tensions in the Middle East, oil prices will rise to $120 per barrel in 2024 and $100 per barrel in 2025.
A potential embargo by the Arab oil-producing world on the sale of hydrocarbons to Israel and its supporting countries could lead to a sharp spike in prices. But for now, the market is offsetting the risks associated with the escalation of the Palestinian-Israeli conflict.
Another factor to consider when forecasting oil market demand is Russian supplies. On the one hand, high oil prices are favorable for Russia, which is already subject to Western embargoes. In this context, Russia’s earlier promise to continue reducing supplies seemed logical. On the other hand, analysts around the world find no confirmation of these statements – they do not see a decrease, but rather an increase in Russian exports, intensifying market pressure.
Perhaps Russia is not keen on fulfilling its promises because, as Western officials quoted by the Financial Times claim, its oil is sold nowhere in the world for less than $60. The reason for this has been revealed by Reuters, which reports, citing informed sources, that Russia is almost completely circumventing the US-imposed price cap on oil sales. About 100 maritime vessels are under suspicion for violating sanctions. Notifications about this have been sent to companies in approximately 30 countries worldwide.
However, whether Russia should fear new potential sanctions is another question. Regarding the potential impact of Western sanctions, it’s worth waiting for more details. Overall, global demand for Russian crude remains high, as does Russia’s role in the global energy market. It is quite possible that the initiators of new restrictions, like most of the previous ones, will face difficulties in their practical implementation.
At present, the export of Russian oil is significantly independent of Western companies, making it difficult for the EU to lower Urals prices below the “ceiling.”
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