Oil price rally set to falter as demand doubts loom

The return to investment in and growth from offshore production also make a long-term rally less likely, Goldman analysts said, adding “most of the rally is behind us”. — Reuters

OIL prices may be near US$100 a barrel, but a range of factors could prevent a sustained rally above that level, analysts say.

They include a projected rise in non-Organisation of the Petroleum Exporting Countries production, in addition to Russia’s need to boost supply to increase revenue and the potential for oil demand to slow given already-high interest rates in major Western economies.

Brent peaked at nearly US$96 a barrel last week and US West Texas Intermediate hit US$91 a barrel for the first time in 2023.

A growing number of analysts forecast Brent will surpass US$100 a barrel this year as demand rises, supply is constrained, and stocks of fuel and crude are relatively low.

Retail fuel prices in the United States and Europe have risen to multi-month highs as crude prices have rallied.

“If energy prices increase and stay high, that’ll have an effect on spending, and it may have an effect on consumer expectations for inflation, things like that. That’s just things that we have to monitor,” US Federal Reserve chairman Jerome Powell said last week.

Morgan Stanley analysts echoed the sentiment, that although central bankers may be wary of rising oil prices, a rally “must be sustained for some time to have a greater, more durable effect on core prices”.

A long run above US$100 could increase inflationary concerns for governments that have hiked interest rates to combat rising prices as their economies emerged from the Covid-19 pandemic.

Non-Organisation of the Petroleum Exporting Countries and its allies (Opec+) output growth could calm any rally. Goldman Sachs sees non-Opec+ supply rising by 1.1 million barrels per day (bpd) by next year, while the International Energy Agency has forecast growth of 1.3 million bpd.Brazil, Guyana and the United States are among the countries expected to increase output.

The return to investment in and growth from offshore production also make a long-term rally less likely, Goldman analysts said, adding “most of the rally is behind us”.

High interest rates are already curbing demand across Western economies, including for oil. Geopolitical considerations may also complicate decisions around how long Opec+ can sustain voluntary cuts.

Supply curbs implemented by Opec+, in particular a combined 1.3 million bpd voluntary cut from Russia and Saudi Arabia until the end of 2023, have played a leading role in pushing futures prices to 10-month highs.

But Russia may be unable to curb exports for a protracted period given the toll of the war in Ukraine on its finances, PVM’s Tamas Varga said.

For Opec’s de facto leader Saudi Arabia, the perennial issue of achieving prices high enough to reward producers without pushing the market to a level that destroys demand and tips the economy into recession is likely to resurface in policy considerations, analysts said. — Reuters

Robert Harvey and Natalie Grover write for Reuters. The views expressed here are the writers’ own.

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