What will come after the “dive” to $72?

By | May 9, 2023

After three straight weeks of declines fueled by concerns about a recession in the US economy (which is the world’s largest consumer of oil), oil prices snapped their downward streak, ending Friday and Monday higher. This is the longest consecutive period this year in which oil has closed lower, having fallen, until last Friday, by 8%. However, analysts believe this will not last as prices approach a level below which they will not move further. Instead, after this point, its course is expected to continue upwards.

More specifically, Brent closed last week down 5.3%, while US crude fell 7.1% despite the rally we saw on Friday. In fact, last Wednesday, Brent fell to its lowest level since December 2021, according to Refinitiv data. The “drop” took it to $72.33. Consequently, US crude oil has fallen 11% this year, on an annual basis.

Prices reversed sentiment and strengthened on Friday and Monday, closing up more than 2%. But on Tuesday morning they lost some of the gains they had “taken” in the previous two sessions, with Brent falling 0.7% to $76.47 and US crude also falling 0.4% to trade at $72. .66.

What fueled the decline?

The price drop has been blamed on a number of concerns about the economy.

The latest downward move was attributed to two factors: data on China’s import-export performance in April, which reignited concerns about the country’s recovery and energy demand this year, and market caution over the announcement of US inflation data in April, which will be key to the next Federal Reserve (Fed) decision.

Fed decisions and news from China shape the mood in general. Last Wednesday, for example, the Fed decided to raise interest rates another 25 basis points, fueling investor concerns that slowing economic growth could dampen demand for energy.

China’s manufacturing activity data for April moved in the same direction last week as it recorded an unexpected contraction, raising concerns once again about the path of recovery in Chinese demand for goods.

“The view that oil markets will contract later this year due to rising Chinese demand is questionable,” the Commonwealth Bank of Australia (CBA) wrote in a May 8 note, adding that possible market tightening oil (with production restrictions and price increases) in the second half of 2023 will now depend more on OPEC+, and especially on Russia.

It is recalled that the reduction in production by some OPEC+ members is effective from this month, while the group will hold its next meeting on June 4.

The recent downward movement in oil prices is reminiscent of the volatility seen in March and “forces” OPEC to consider whether or not to make another production cut (to support prices), he said, embracing the deal. of Vishnu Varathan of Mizuho.

On the other hand, S&P’s Kang Wu does not rule out a reaction from OPEC, saying there is “great uncertainty” about what its next move will be. “Unless they see a real hit to demand, either from a weakening economy or rising prices, then they’ll probably wait a little longer to decide what to do.”

Because the downward trend will not continue

The temporary turnaround in oil prices over the past two sessions was driven by a “healthy” April US jobs report that lifted oil 4% on Friday, despite labor market signals potentially lead the Federal Reserve to keep interest rates high for longer. .

At the same time, market analysts see oil approaching levels below which it will no longer fall. Thus, they expect a significant price rise in the coming quarters. “We look more positive in the second and third quarters than we did in the first,” said Ed Morse, director of Citi Commodities Research.

Along the same lines, financial services firm ANZ also noted that the oil bearish streak is likely to end soon, as global oil demand is expected to rise by 2 million barrels per day, creating “hungry” demand conditions. ” throughout 2023.

“The reduction in OPEC+ production and the recovery in demand in China will likely offset the slowdown in demand in other regions… Therefore, we expect prices to bottom out soon,” the bank said.

Similarly, Goldman Sachs maintained its forecast of higher crude oil prices. “Our estimate remains that Brent will rise to $95 a barrel in December and $100 a barrel in April 2024 as we expect large deficits in the second half,” the investment bank said.

This opinion is not shared by Edward Moya, market analyst at OANDA. “Oil prices will not be able to go as high from now on given all the concerns about rising demand, but expectations are high for OPEC+ to try to keep prices above $70 a barrel.”

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