Commentary

Oil prices stagnate as tensions ease

May 16, 2024   ·   0 Comments

By Rashid Husain Syed

Oil market prices have remained tightly confined within a specific range and have struggled to break out. Last Friday marked the largest weekly drop since February. Benchmark U.S. crude oil for June delivery decreased by 84 cents, falling to US$78.11 per barrel. Meanwhile, Brent crude for July delivery dropped 71 cents to US$82.96 per barrel.

Easing geopolitical tensions in the Middle East and the growing possibility of a truce between Israel and Hamas are having an impact on oil markets. As diplomatic efforts to renew discussions between Hamas and Israel intensify and hopes for a ceasefire in Gaza grow, oil markets took a hit. The reduction in geopolitical risk has led to a decline in the war premium on oil prices.

“Futures have been on the defensive on calming Geopolitical issues … traders are realizing no real barrels are being pulled off the global stage (other than [from] Ukraine attacks on Russia) which so far have been temporary disruptions,” Dennis Kissler, senior vice president at BOK Financial, said last Wednesday in a note to clients.

Other factors are also coming into play. Bearish sentiment is building in oil markets after the latest U.S. economic data sparked concerns over future oil demand. Traders continue to weigh the possibility of interest-rate cuts and eagerly await the Federal Reserve’s policy decision.

However, the possibility of any immediate cut in U.S. interest rates is not strong. Some Federal Reserve officials are now signalling that interest rates may remain high for “some time.” In the meantime, the U.S. economic data released last Tuesday also reinforced bets that Fed officials will keep rates steady at a two-decade high. Markets got the message, underlining that this could drag down oil demand, adding further pressure to crude oil prices.

Oil prices also fell after it was reported that U.S. crude inventories surged to their highest levels since June. According to an Energy Information Administration (EIA) report, U.S. crude stockpiles rose by 7.27 million barrels last week, marking the largest increase since early February. This rise exceeded the 4.91 million-barrel gain predicted by an industry group last Tuesday.

“The surprise build from the EIA caught most traders off guard,” Kissler of BOK Financial Securities emphasized. When combined with elevated interest rates and the accelerated liquidation after crude broke through moving averages, “the long side of crude is losing its lustre.”

In another sign of bearishness, contracts are trading below their 50-day moving averages. A sustained break below those levels could spur further selling.

Other signs of softening pervaded the oil market this week, beyond the 6.8 percent drop in headline prices, Bloomberg underlined in a report. Gauges of the futures curve have weakened, indicating that supply constraints are easing. Furthermore, options markets appear to have erased the war’s risk premium.

The downward movement of oil markets is fueling speculation that the Organization of Petroleum Exporting Countries and its allies in the OPEC+ will prolong output cuts, with 87 percent of traders and analysts surveyed by Bloomberg predicting that it will extend the curbs, potentially until the end of the year. “OPEC+ will want to see evidence of sustained tightness in oil markets before starting to add supply, so there’s a good chance they will decide to extend,” said Richard Bronze, an analyst at Energy Aspects Ltd. “The discussions will not begin in earnest until closer to the meeting date.”

To be fair, OPEC+ still faces significant challenges. It has yet to meet its output reduction targets. While OPEC’s crude production remained stable last month, the actual cutbacks fell short of the targets set.

A Bloomberg survey reported that OPEC+ produced 26.81 million barrels a day in April, roughly 50,000 barrels a day less than the previous month but still above its target. Iraq and the United Arab Emirates continued to exceed their agreed limits by several hundred thousand barrels a day. Additionally, minor production increases were also reported in Libya and Iraq.

With market prices remaining below the target price anticipated by major oil-producing countries, an uncertain demand trajectory, and troubling financial data emerging from major economies, OPEC+ cannot afford to increase its output. Given these circumstances, it is reasonable to align with the expectations of most traders that at its June 1 meeting, OPEC+ will extend its current output restraint policy at least until at least the end of the year.


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