If something characterizes the oil market lately, it is the rise in prices but also its unexpected decline. Black gold closed on Friday for a third consecutive week of losses, breaking its longest streak since 2023.
Analysts, however, believe that the downward trend is coming to an end and oil prices will rise in the coming quarters.
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Speaking to CNBC, Citi’s head of commodity research Ed Morse notes that there are multiple indications that prices have bottomed out. Inventories rose significantly in the first two months of the year and then fell, a sign that prices are bottoming out. He added that the markets are currently dealing with the impact of the recent OPEC+ production cuts and that the world is entering a period of increased demand. “We’re more positive in the second and third quarters than we were in the first,” Morse explains.
The OPEC+ surprise
On April 2, OPEC+, led by Saudi Arabia, surprised everyone by announcing that it would cut daily oil production by 1.6 million barrels per day, using the long-standing power of the oil cartel to shape oil prices. .
According to an investigation by Goldman Sachs, which reviewed Agency communications dating back to 1983 when it introduced production quotas, the power of the oil cartel is indisputable. Its researchers used 9,426 daily observations during the OPEC announcements, on the course of the Brent price, while simultaneously studying changes in the S&P500 stock index, the TWI dollar index, and the 1-year US bond yield.
The main conclusion is that the cartel’s impact increases when its market share of world oil production is high, when there is limited price flexibility in non-OPEC oil supply, and when world oil demand is inelastic. .
After a few days in which prices did confirm the expectations of a rise, they very quickly began to erase a downward trajectory, falling below 80 dollars, almost below the levels of early April, before the OPEC+ announcement. .
Price rise forecasts
Financial services firm ANZ also believes the oil price slide is coming to an end as global demand will increase by 2 million barrels per day while supply is tight. It is recalled that Russia is also extending its own production cuts until the end of the year.
“OPEC+ production cuts and recovering demand in China will likely offset slowing demand elsewhere…We therefore expect prices to bottom out soon,” the ANZ analysts wrote.
The forecasts of Goldman Sachs are in the same vein, which maintained its forecast of a higher price of crude oil in April 2024 as we expect large deficits in the second half,” according to a report from the investment bank.
40 analysts and economists polled by Reuters see oil prices rising to $90 as they predict the price of black gold will be supported by higher demand from China and market tightening after recent OPEC+ production cuts .
According to experts, Brent crude prices are expected to average $87.12 a barrel this year, a higher average forecast than in the previous March survey.
Brent was trading up 1.74% at $76.61 a barrel on Monday, while US West Texas Intermediate futures were up 1.92% at $72.71 a barrel.
A sharp drop in oil
Brent is down 8% since last Friday. On Wednesday, the benchmark index closed at $72.33, its lowest level since December 2021, according to Refinitiv data, and the West Texas Intermediate is down 11% year-to-date.
The price drop is attributed to worrying economic data.
Starting with the recent rise in interest rates in the US and its impact on the real economy, which could cause a slowdown and a hit in demand. “Pressure from deflationary action by both the US Fed and the ECB has led to sluggish demand growth across most of the OECD, with recessionary risks looming,” Morse notes.
Oil prices have fallen below $80, after rising to $120 in early June last year.
In this environment, recent economic data on manufacturing activity in China have raised concerns. Manufacturing unexpectedly contracted in April, increasing pressure on politicians trying to jump-start an economy struggling to recover from the pandemic in an environment where global demand is subdued.
The manufacturing PMI fell to 49.2 from 51.9 in March, data from China’s National Bureau of Statistics showed, below the 50-point mark that separates expansion from contraction in activity on a monthly basis.
The ball back to OPEC again
“The narrative that oil markets will tighten later this year due to rising Chinese demand is being called into question,” the Commonwealth Bank of Australia report said. “The tightening of the oil market in the second half of 2023 will now depend more on OPEC+, especially Russia”
And Moscow’s oil production has proven more resilient than expected. “Russia’s oil production and exports held up despite the announcement of a 500,000 bpd production cut,” said S&P Asia and global demand head Kang Wu.
The recent drop is reminiscent of bearish volatility in March and fuels the scenario of whether or not OPEC will make another Saudi-led cut, market officials say.
But S&P’s Wu believes there is still “great uncertainty” about what the cartel’s next move will be.
June will be the annual meeting of the competent ministers of the OPEC+ member countries, analysts believe that Saudi Arabia will set the tone “if they do not see a real destruction of the demand either by the weakening of the economy or by the jump Of demand”. prices, they will probably maintain these production levels for a bit longer to decide what to do,” Wu concludes.