Fri, 06/21/2024 - 08:24
It's been a while since oil's last major surge back in the summer of 2022, but after a precipitous correction in early 2023, the energy resource has been quietly but steadily gaining in value amid a trifecta of organised production cuts, geopolitical uncertainty and increased industrial demand. Brent, for instance, is up almost 25% from where it was twelve months ago and now sits at $85.21 a barrel (18/06/2024), having risen briefly above $90 in April when Iran-Israel tensions reached a fever pitch. With the flagship crude now having broken a three-week losing streak to rise almost 5% in the past week alone, investors are beginning to wonder whether Brent has the potential to push back above $90 in the coming weeks and months.
Beyond positive comments from the Fed that many have interpreted as promising an imminent rate cut in September, the summer driving season is just around the corner and industrial demand — particularly in China — remains high. In addition to this, OPEC+ has agreed to extend its voluntary output cuts into 2025. With these factors and the ongoing geopolitical tension in the region, would investors be wise to bank on higher oil prices in the second half of the year? In this article, we'll cover what we expect will be the main influencers of oil prices in H2 2024 and explore where the market could be headed.
Looking good on the home front
Comments made by New York Federal Reserve President John Williams in which he intimated that the central bank's policy shift could be imminent were doubtlessly behind some of crude's gains this week. When asked whether he could see a rate cut coming in September, Williams replied: "I think that things are moving in the right direction". While he declined to commit to a firm date, it's generally understood that the relatively strong labour market and steady inflation are going to be sufficient to permit the long-awaited policy shift to materialise before the year's end. This will, in turn, facilitate corporate activity, including manufacturing and industrial production, which will axiomatically increase demand for oil, thus buoying prices.
Furthermore, the natural demand increase from the summer driving season is expected to be exacerbated by an increase in domestic holidaying across the West. US crude inventories are also expected to have fallen by 2.3 million barrels last week, according to analysts polled by Reuters. The American Petroleum Institute will release its latest report on domestic oil inventories on Thursday afternoon EDT, but if the numbers are in line with predictions, that would be yet another clear factor for growth across the full basket of US crudes. While this may only be a temporary factor, if combined with confirmation of a rate cut by the Fed, it could just be enough to push Brent above $90.
Don't forget about OPEC
Beyond natural market forces and central bank policy, there are several other factors that are extremely difficult to account for and that have a strong impact on oil prices. Unsurprisingly, one of the most powerful influencers of the global oil market is OPEC+. The Saudi-led cartel of major oil-producing countries has been managing prices through production cuts for at least the past two years. OPEC+ member states are currently voluntarily limiting production by a total of 5.86 million barrels per day (approximately 5.7% of total global demand). Of these, 2.2 million bpd were due to expire at the end of this month, with the rest expiring at the end of 2024.
Then, this Sunday (16/06), the cartel agreed to prolong the 3.66 million bpd cuts until the end of 2025 and extend the 2.2 million bpd cuts by another three months until the end of September 2024. The intended effect of this will be that prices will be supported at their current levels, though it's possible that the artificial throttling of supply could push crude prices above their local resistance levels if demand continues to increase, reserves are exhausted, and the Fed rate cuts materialise sooner than expected.
Nonetheless, as Saudi Energy Minister Prince Abdulaziz bin Salman said: "[OPEC+] are waiting for interest rates to come down and a better trajectory when it comes to economic growth... not pockets of growth here and there," which would suggest that the cartel is ready to reduce the cuts if other price-supporting factors emerge.
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