Oil recovers from 4-month lows despite demand fears

Business Wednesday 12/June/2024 17:42 PM
By: Times News Service
Oil recovers from 4-month lows despite demand fears

Muscat: Crude oil prices went below the $80 per barrel level for the first time since February-2024 during the first week of June-2024 but swiftly recovered as OPEC reiterated its demand growth expectations and traders viewed the current price trend as an overreaction and an oversold market, according to a new report.

“The sanctions on Iran’s shipping sector also supported prices. The initial monthly decline was led by receding war risk premium as well as fears that near-term demand may not be as healthy as was being expected, especially in China,” the Kuwait-based Kamco Invest said in its latest Oil Market Monthly Report June 2024.

“This was also reflected in the physical market with lower quoted prices by producers eyeing lower-than-expected summer demand,” it further added.

The slide in prices last week also came after the OPEC+ meeting that proposed limited and controlled unwinding of the additional voluntary cuts, depending on the demand trends starting from the fourth quarter of 2024.
On the other hand, minimal support came from an unplanned shutdown of Buzzard oil field in the North Sea and the fuel refinery fire in Russia. Data from US EIA showed positive trends for the summer demand season with higher demand for gasoline and higher refinery runs, but an increase in crude oil inventories affected prices.

The Kamco report further said that on the supply front, crude oil flows rebounded during May-2024 backed by increase in global seaborne crude shipments from US Gulf and West Africa. In the region, Saudi and Oman reported a decline in exports while Kuwait, Qatar, Iraq and the UAE reported an increase in shipments during May-2024. Data from Russia also showed a year-on-year (y-o-y) increase of 50 percent in oil revenues during May-2024, although recent weekly data on crude oil exports showed declines with shipments hitting the lowest level since February-2024 as Russia compensates for the overproduction against its April output target.

On the economic front, the Bank of Canada and the ECB implemented the first rate cuts after years of elevated interest rates. The cuts reflect softening inflation levels in these economies. The Fed is also touted to implement cuts this year depending on the trend in inflation in the coming months. The inflation in the US for April-2024 came in as per expectation but the Fed indicated that it needs more proof before implementing the rate cuts. Economic data in the US also showed lower consumer spending, mixed ISM data and the latest personal consumption expenditure came in as expected, all indicating greater proof of upcoming rate cut but at the same time lowering the expectation for oil demand growth in the coming months led by falling economic growth.

Oil production in the US remained elevated at 13.1 mb/d over the last eleven weeks ending May-2024.
This came despite oil rig count declining for the second consecutive week last week to reach 492 oil rigs. Oil production by the OPEC showed marginal growth during the month led by marginal drop in production in Saudi Arabia that produced at 9 million barrels a day (mb/d) that was more than offset by higher production in Nigeria.

Oil prices
Oil prices remained volatile over the last few weeks and traded in a wide range led by significant news on both the economic front as well as on crude oil production. Crude oil futures prices went below the $80 per barrel level at the start of June-2024 led by negative news on the demand front while supplies from outside of the OPEC+ group remained elevated. Prices declined for three consecutive weeks until last week and in seven out of the last nine weeks and traded from over $91 per barel to close at $79.6 per barrel last week. Traders also took cues from Aramco’s cut in all its crude prices for Asia for July-2024.

This week, however, saw positive news on the demand front as well as due to technical reasons as traders started assessing the market is oversold and overreaction to the OPEC+ decision to gradually restore the voluntary production cuts. Prices regained the $80 per barrel mark and traded close to $82 per barrel after witnessing the biggest daily gain since February-2024 at the start of this week. Support also came from a stronger-than-expected jobs report in the US, better than expected reading on manufacturing and services sector activity as well as expectations of a strong summer travel demand. The rate cuts announced by key central banks, including the ECB, also supports forecast of a demand recovery in the near term, although the ECB warned that the cut does not mean a linear declining trend.

In terms of monthly price trend, prices of all crude grades reported gains declines during May-2024. Average spot Brent crude oil price was down by 9 percent to reach $81.8 per barrel during May-2024 as compared to $89.9 per barrel during April-2024. The decline in average OPEC reference basket price was slightly milder at 6.2 percent to reach $83.6 per barrel while Kuwait export grade crude witnessed a decline of 5.1 percent to average at $85.2 per barrel during May-2024. Meanwhile, the consensus estimate for Brent crude showed minimal changes as compared to last month and was flattish for the next four quarters. According to Bloomberg consensus estimates, crude oil prices are expected to average at $85.1 per barrel in the second quarter of 2024 and remain elevated over $83/b level till the end of the year.