Crude Oil Q2 Fundamental Outlook

Crude oil prices may continue to rise 2024’s second quarter but they remain subject to the considerable near-term uncertainty that dogged them as the year got under way.

The Organization of Petroleum Exporting Countries and its allies (the so-called ‘OPEC +’ grouping) have agreed to extend their production cuts of 2.2 million Barrels Per Day. Saudi Arabia is of course the groups’ serious muscle. Its voluntary one million BPD share of the reductions is set to be in place through to the end of June.

These cuts are perhaps the primary reason why oil prices have risen this year. Keeping them in place will offer the market plenty of underlying support. OPEC is no longer quite the arbiter it was, however, and supply from outside the cartel will inevitably blunt the effect of production cuts within it. That said US oil production hit a record in December 2023. It may well have nowhere to go but down from there, at least in the near-term. That prospect may embolden OPEC to stick with production cuts, knowing that they’ll be that much more effective.

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Demand Picture Looks More Hopeful

Oil prices retreated from 2022’s highs as the Covid pandemic, rising inflation and higher interest rates added up to a well-supplied market meeting highly uncertain demand.

This year perhaps promises some better balance. Overall petroleum demand is expected to rise, even if the market’s key players can’t agree on the likely extent of this. OPEC thinks it’ll be 2.25 million BPD this year, while the International Energy Agency forecasts a much more restrained 1.1 million. That’s a significant difference of view.

There are also signs that Chinese demand is getting back to pre-pandemic levels. In the western industrial economies, inflation’s grip is relaxing and there’s broad central banking consensus that interest rates have peaked. Falling rates and cheaper credit ought also to be good news for energy demand.

Caution is warranted, however. Conflict in Ukraine and Gaza will continue to hit the energy market via any number of channels. Russia remains under Western sanction and Ukrainian attacks on its energy infrastructure appear to be increasing. JP Morgan has reportedly said that attacks have taken 900,000 BPD of Russian refining capacity offline and could add as much as $4/barrel of risk premium to the global market.

Yemeni rebels continue to strike Western shipping, supposedly in support of the Palestinian cause.

The fight against inflation may also take longer than markets currently expect, keeping interest rates higher for longer. The Federal Reserve still thinks borrowing costs will be markedly lower by year end, but it will be the hard inflation data which ultimately decide this.

The fundamental outlook for crude prices may remain modestly bullish, but the path higher is likely to be an uneven one.

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