{"id":5424,"date":"2023-05-16T12:42:57","date_gmt":"2023-05-16T12:42:57","guid":{"rendered":"http:\/\/roydadnaft.ir\/English\/?p=5424"},"modified":"2023-05-16T12:45:45","modified_gmt":"2023-05-16T12:45:45","slug":"opec-cut-failed-to-lift-oil-prices-but-the-year-isnt-over-yet","status":"publish","type":"post","link":"https:\/\/roydadnaft.ir\/English\/5424\/","title":{"rendered":"OPEC Cut Failed To Lift Oil Prices, But The Year Isn\u2019t Over Yet"},"content":{"rendered":"
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Many analysts continue to see a tighter oil market in the second half of 2023.<\/p>\n\n\n\n

Crude oil prices have been on a losing streak for four consecutive weeks now, erasing all the gains they booked after OPEC\u2019s latest supply cut announcement as economic fears take precedence over demand expectations.<\/p>\n\n\n\n

When the cartel announced the cuts, almost every bank with a commodities department rushed to update their price forecasts, expecting prices to jump even higher than before. Morgan Stanley was a rare\u00a0exception: it revised its price forecast for oil downwards.<\/p>\n\n\n\n

\u201cOPEC probably needs to do this to stand still,\u201d Martijn Rats, chief commodity strategist at the investment bank, said at the time, adding that the OPECc+ decision \u201creveals something, it gives a signal of where we are in the oil market. And look, let\u2019s be honest about this, when demand is roaring\u2026then OPEC doesn\u2019t need to cut.\u201d<\/p>\n\n\n\n

He seems to have been right, for the most part. Only it\u2019s not demand itself that was the problem. It has been the popular expectation of worsening demand that has been driving the price decline.<\/p>\n\n\n\n

Indeed, the daily media updates on oil prices have, in the past four weeks, repeated the same refrain over and over again: weak U.S. and Chinese economic data, fears of more interest rate hikes in the U.S., fears of a recession, which is already a fact in certain industries, notably freight transport.<\/p>\n\n\n\n

Clearly, these expectations have had a sound basis. The thing about oil demand, however, is that the U.S., or the rest of the developed world, is not where additional oil demand will be coming from in the rest of the year and future years. It\u2019s the developing world that will see growth in oil demand with the potential to drive prices higher.<\/p>\n\n\n\n

Dutch ING said in a recent oil market update<\/a> that while oil prices remain depressed for now, things could very well change in the second part of the year, with a deficit looming on the horizon. <\/p>\n\n\n\n

The basis for this forecast is a combination of lower OPEC+ output, higher demand outside the OECD, and a smaller-than-expected growth in U.S. output, according to ING. What\u2019s more, there is always the possibility that OPEC+ will cut output again, adding to oil\u2019s upside potential.<\/p>\n\n\n\n

The Dutch financial services major is not the only one expecting higher prices later this year. Citi\u2019s commodities head Ed Morse recently told<\/a> CNBC that oil prices may have bottomed out, and we\u2019re entering peak demand season in the much more populated northern hemisphere.<\/p>\n\n\n\n

\u201cOPEC+ output cuts and a rebound in China\u2019s demand will likely offset slower demand elsewhere … Therefore, we expect prices to bottom out soon,\u201d the Commonwealth Bank of Australia said in a note from early May.<\/p>\n\n\n\n

Goldman is another bank that\u2019s optimistic about the immediate future of oil prices. In a note<\/a> from early March\u2014weeks before the surprise OPEC+ cut announcement, the bank said Brent could reach $100 by the end of the year if OPEC keeps its 2-million-barrel output cut agreement in place.<\/p>\n\n\n\n

Again, that was before the OPEC+ additional cut announcement that temporarily boosted prices. And it might well boost them once again as the year progresses. All it would take would be a more optimistic economic update from either China or the United States.<\/p>\n\n\n\n

Of course, all these are only projections based on historical data and some common sense. The thing about markets, however, is that they do not always obey common sense but tend to get swayed on a dime.<\/p>\n\n\n\n

The past four weeks are evidence of that, with oil traders largely ignoring any fundamentals to focus on what banks call the macro picture. They have ignored data about Chinese refinery throughputs and oil imports to focus on the latest PMI, which has shown a contraction in the country\u2019s growth pace. They have ignored data about U.S. production trends to focus on the April CPI reading, which showed inflation remains a substantial problem.<\/p>\n\n\n\n

All this is perfectly understandable: the so-called macro picture has a huge bearing on oil demand, which tends to decline in times of high inflation and rising interest rates. The thing that gets forgotten, however, while watching that macro picture is that oil, for all its bad rap, is what economists call an inelastic commodity.<\/p>\n\n\n\n

This means that whatever the price for the commodity, there will always be strong demand for it. And this, in turn, means that it might be time for traders to focus a bit more on the supply outlook. Because when supply tightens, prices will rise\u2014demand will be going nowhere, even in inflation-stricken U.S.<\/p>\n\n\n\n

What\u2019s more, as ING noted in its oil market update, OPEC+ is aware of the power it can wield in output control. There is nothing to prevent it from doing it again should prices fall too low for its liking. After all, how much market share can it lose?<\/p>\n

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