Oil Prices Reverse from 4-Month Lows

Crude prices have been on a roller coaster as prominent analysts disagree on what path the market will take in the new interest rate paradigm.

Hitting Lows After OPEC+

Recently, oil prices have fluctuated significantly as analysts disagree on its future path in a challenging interest rate environment. Last week, in particular, crude prices dropped to their lowest level in four months despite OPEC+ keeping production cuts in place through the end of the year. Markets were concerned that the cartel intends to gradually reduce voluntary output reductions going forward, particularly for Saudi Arabia, which currently withholds 3 million barrels per day. Analysts believe that the world's top crude exporters, Saudi Arabia and Russia, are under pressure to generate revenue after over a year of restricting production.

Meanwhile, demand is seen as weakening, with the IEA again lowering its forecast for consumption growth this year after a decline in March. Wednesday's report on US stockpiles showed another 3.7 million barrel build, indicating slower domestic demand despite falling pump prices, suggesting weakness among American consumers. China, the largest importer, reported slowing imports in trade data released earlier this week, too, with declining volumes over the past five months.

Oil Price Outlooks Differ

Despite lower prices earlier this month, Standard Chartered maintained that supply issues would continue and the sharp sell-off lacked a rational basis. While no specific target was mentioned, comments after the drop below $80/bbl imply this is a level Standard Charter analysts view as reasonable. This aligns with Morgan Stanley's $86/bbl view, citing expected strong demand. Meanwhile, Citi analysts say crude could fall below $60/bbl due to demand loss exceeding surplus later in the year. Both the IEA and OPEC forecast demand outstripping supply later this year, but easing OPEC's voluntary cuts could increase production.

Therefore, the issue may involve timing. Oil bears believe long-term demand trends lower as fossil fuels phase out. But short-term supply shocks or geopolitics could still raise prices, oil bulls argue. While easing monetary policies globally (the ECB cut already and the Fed is expected to cut after the summer) may support demand, consumer trends show lingering weakness. Also, a recession drastically cutting demand can't be ruled out.

WTI in Correction?

The oil price has recovered all losses seen earlier in June. However, the impulse structure from $87.20 down implies that the recent upside from $72.50 up may simply be a temporary correction. Breaking above $80.60 could allow the price to rise further to $84 and the previous high unless buyer momentum is lost below $76, which may then expose the price to further downside.

Source: SpreadEx / Light Crude

Key takeaways

Oil prices crashed to a four-month low last week as OPEC+ signalled it may ease voluntary curtailments to generate cash flow. Demand is weakening as the IEA again cut growth forecasts and US inventories rose. But both IEA and OPEC expect demand to exceed supply later in 2024, but easing production cuts could increase supply. The short-term outlook remains uncertain given the transition away from fossil fuels, potential supply shocks or geopolitics impacting prices in the near term despite weaker demand trends. Analyst views also diverge on prices, with Standard Chartered seeing a supply crunch supporting $80/bbl oil but Citi predicting below $60/bbl due to demand loss outpacing supply.

​