Robust Oil Demand Would Support Prices

Delayed interest rate cuts could weigh on oil demand
EIA reports crude inventories increased significantly last week
The oil market is expected to tighten in the second half of the year
OPEC maintains robust oil demand forecasts but will start to unwind output cuts

Crude oil prices experienced a sharp selloff following the latest announcement from the Organization of the Petroleum Exporting Countries (OPEC) that the cartel plans to gradually start to increase production from October. The price of West Texas Intermediate (WTI) sold off on the news but has rebounded strongly from $72.48 and has recovered the losses as tensions in the Middle East continue to support prices.

Interest Rate Cuts

During its June meeting the Federal Reserve pushed out the start of rate cuts to perhaps as late as December, projecting only one interest rate cut for the year, down from previous estimates of three cuts. The decision came amid estimates inflation will remain elevated while the Fed needs to gain greater confidence that inflation is moving sustainably toward the 2% target. Generally, higher borrowing costs tend to dampen economic growth, which in turn could limit oil demand. Nonetheless, crude prices did not lose ground on the news.

U.S. Crude Oil Stocks

According to the U.S. Energy Information Administration (EIA) U.S. crude inventories surprisingly increased by 3.7 million barrels to 459.7 million barrels for the week to the 7 ^th of June, vs. expectations of a 1 million barrel-draw. The change compared with a weekly build of 1.2 million barrels for the previous week. Gasoline stocks also rose more than expected, up by 2.6 million barrels to 233.5 million barrels.

Global Supply and Demand

The EIA, the International Energy Agency (IEA) and OPEC last week updated their views on the global oil demand-supply balance for 2024, predicting declines in global oil inventories, which should provide support to prices in the second half of the year.

OPEC expects the services sector, especially travel and tourism to maintain positive momentum and drive economic growth in the second half of the year. The cartel expects a steady economic growth this year and is projecting oil demand growth of 2.2 million barrels per day for 2024 and 1.8 million bpd in 2025. The group sees global economic growth of 2.8% this year and 2.9% in 2025.

Meanwhile, the EIA revised up its oil demand growth outlook from 900,000 bpd to 1.1 million bpd for this year. EIA’s forecast is in a stark contrast to OPEC’s and appears to be a bit conservative, while OPEC’s one a bit too optimistic. Therefore, demand growth will most likely be somewhere between.

Source: TradingView

OPEC+ Unwinding Output Cuts

OPEC+ has been cutting output for more than a year, totalling approximately 5.7% of the overall global crude supply. The cuts have been implemented in an attempt to prevent the emergence of a huge supply surplus, which in turn could suppress crude prices and hurt the economies of the oil-dependent OPEC member countries.

Despite the cuts, oil prices have been trading sideways over the past year, which is a result of record U.S. crude production, which has lifted up global supply. Concerns about sluggish demand from China and other major economies also weighed on crude prices.

Earlier in June, in its monthly meeting the cartel agreed to extend those deep reductions in crude output into 2025. However, the group also announced that it would start to gradually unwind some of the cuts from the 1 ^st of October, which could exert downward pressure on oil prices.

Technical Analysis

The price of WTI has been trading sideways over the past year, fluctuating between $63.64 and $95.03. Momentum indicators remain in neutral territory suggesting that prices are likely to remain within the range over the medium-term.

Last week’s price action broke above its short-term down trend line from its April high suggesting that the correction is likely to be over. While a mild pull back could be seen in the very short-term, levels in the range between $85.00 and $87.00 are achievable in the coming months.

Active traders looking for magnified exposure to crude oil may consider Leverage Shares +2x Long WTI Oil and -2x Short WTI Oil ETPs.

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