Oil Prices Fall as U.S Fed Sets to Decide on Rate
The oil prices fell on Wednesday ahead of U.S. Fed decision on interest rates. The oil market halted its successive price upticks midweek as West Texas Intermediate (WTI), Brent fell back slightly.
Brent was trading at $92.88 while WTI had fallen back toward $90. U.S. Federal Reserve is widely expected to keep interest rates on hold.
The oil market has seen quite a move in recent months, ING Head of Commodities Strategy Warren Patterson said in a note, noting that ICE Brent is up more than 25% so far this quarter and broke above $95/bbl briefly.
A week after Saudi Arabia and Russia announced the extension of their production cuts, Brent crude and WTI hit 10-month highs with more analysts and industry executives now forecasting oil’s return to $100.
Tightening fundamentals support this move and the market is likely to see Brent breaking above $100/bbl in the near term, saying such a move may not be sustainable
OPEC+ supply cuts have had their desired effect on the oil market – at least from OPEC+’s perspective, though less so for consumers with surging energy costs amidst global economic imbalances.
The additional voluntary cuts from Saudi Arabia, which have been extended through until the end of this year, have ensured that the market will remain in deep deficit for the remainder of 2023.
This should keep both the flat price and time spreads well supported, Patterson said in the note, adding that the move in oil prices is well-telegraphed.
Pressure on OPEC+ likely to grow
OPEC historically always said that its goal is to stabilise markets and that the group does not target certain price levels. Saudi Arabia’s energy minister this week repeated these comments at a conference in Canada.
However, with a deficit of more than 2MMbbls/d and prices approaching $100/bbl, it is difficult for the group to make these claims when OPEC+ output is more than 3.5MMbbls/d below target production levels.
ING analyst said Governments around the world will likely become increasingly concerned about inflationary pressures once again due to the strength in oil, and therefore likely to ask OPEC to open the taps a bit more.
In addition, there are elections in two key oil-consuming countries next year – the US and India – which suggests possibly even more pressure from these two governments.
OPEC+ will also want to be careful about overtightening the oil market. They will be shooting themselves in the foot if they push prices to levels where market participants start to see an increased risk of demand destruction.
Already, demand growth in 2024 is expected to slow to around 1MMbbls/d from around 2MMbbls/d this year due to expectations of weaker GDP growth. Higher oil prices could mean the market could see even more modest demand growth.
“OPEC+ will continue to review supply cuts on a monthly basis, so we could very well see the group – or at least Saudi Arabia – gradually ease its additional voluntary cuts this year, which would help take some pressure off the market.
“Unfortunately, the market will have to rely on action from OPEC+. The lack of drilling activity in the US means we are seeing only modest supply growth from the US, and not enough to offset the large deficit forecast”, ING said.
The US Energy Information Administration (EIA) sees US crude oil output growing by less than 70Mbbls/d between August and the end of this year. It’s difficult to see the US government tapping into its strategic petroleum reserves (SPR) after significant drawdowns last year left SPR at its lowest levels since 1983.
Strong Demand Side
China imported record volumes of crude oil during the first half of this year due to refinery extensions and economic recovery initiatives after the government eased COVID-19 mobility restrictions, according to the US Energy Information Administration (EIA) late on Monday.
EIA data showed that the volume of imported crude oil averaged 11.4 million barrels per day (bpd), marking a 12% increase compared to last year’s annual average of 10.2 million bpd.
China sourced much of the additional crude oil from Russia, Iran, Brazil and the US. Compared with last year’s averages, the country’s imports from Russia increased by 23%, from Saudi Arabia by 7%, and from Brazil by 49%.
China imported more crude oil from Russia in June than it had ever done in a single month before, amounting to a record-breaking 2.6 million bpd. In addition, China’s imports from the US in the first half of this year more than doubled from last year.
The report said that industry analysts indicate that much of the oil that was shipped from Iran to China was relabelled as originating from countries such as Malaysia, the United Arab Emirates, and Oman to avoid sanctions. Naira Devaluation Deepens Economic Crisis in Nigeria