Oil Hits $86 Over Improved Demand Outlook

Trading above $85 per barrel, oil prices have managed to break out of a narrow range since the beginning of the year due to unsettled market dynamics. Brent has spent much of the year trading within a $75-85 per barrel range, ING commodities strategists said in a Thursday note.

The recent surge in crude oil prices has been supported by improved demand in the US, the world’s biggest oil consumer, and a weak US dollar.

Brent rose 0.58% to $86.45 per barrel Thursday while the American benchmark West Texas Intermediate (WTI) traded at $81.70 per barrel at the same time, a 0.53% rise from the previous session that closed at $81.27 per barrel.

Energy Information Administration (EIA) data on Wednesday showed a 2 million-barrel decline in US commercial crude oil inventories last week, against the market expectation of a decrease of around 900,000 barrels.

Gasoline inventories decreased by 3.3 million barrels over the same period. The decline in both crude and gasoline inventories signalled a surge in demand in the world’s biggest oil-consuming country, lending upward support to oil prices.

The US dollar’s depreciation against other currencies contributed to the increase in oil prices by promoting lower-priced trade with holders of other currencies. The US dollar index, which measures the US dollar’s value against other currencies, fell 0.55% to 103.27 on Thursday.

Meanwhile, the US Federal Reserve (Fed) kept interest rates steady during Wednesday’s meeting, leaving the federal funds rate unchanged between the 5.25% and 5.5% target range, the highest in 23 years.

Despite the unchanged rates, the Central Bank expects at least three interest rate cuts in 2024, according to its latest projections. Experts forecast that interest rate cuts will strengthen economic activity and boost demand in all sectors, including the oil market.

The rollover of voluntary supply cuts from OPEC+ into the second quarter of 2024, Ukrainian attacks on Russian refining capacity more recently, and lingering disruptions to oil flows through the Red Sea have provided a boost to the market, according to ING.

Commodities analysts explained that the rollover of supply cuts from OPEC+ means that the oil market will shift from a surplus environment in the second quarter of the year to a deficit environment.

Expectations of a tightening in the market are reflected in the forward curve, with time spreads having moved deeper into backwardation.

“While a rollover of some of the OPEC+ voluntary cuts was expected, the fact that the full 2.2m b/d of cuts was rolled over into the second quarter of 2024 leaves the oil market in a deeper-than-expected deficit over this period.

“Our balance shows a deficit of a little over 1m b/d in the second quarter. As a result, we have revised our short-term price forecast, while also adjusting the profile later in the year with prices likely to peak in the third rather than in the final quarter of the year as previously expected”, ING stated. #Oil Hits $86 Over Improved Demand Outlook

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