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May 23, 2024

Oil Prices Expected to Trade Rangebound Amid Lack of Bullish Triggers

Oil prices have been on a downward trend since the start of the week, weighed down by grim demand expectations due to persistently high interest rates. On Wednesday, both major benchmarks saw declines. Brent crude futures settled 1.18% lower at $81.90 a barrel, while US West Texas Intermediate crude (WTI) fell by $1.09, or 1.39%, to $77.57. Despite these declines, both benchmarks are still up by about 8% for the year, although they have dropped roughly 5% for the month.

Last week, 1.8 million barrels of crude oil flowed into the US commercial reserves, bringing the total to 458.8 million barrels. Meanwhile, weekly gasoline inventories decreased by 900,000 barrels for the week ending May 17, with production averaging 10 million barrels per day. US implied demand for gasoline, diesel, and jet fuel rose for the third consecutive week to 14.2 million barrels per day (mbd), nearly matching the post-pandemic seasonal average of 14.3 mbd. Notably, US gasoline demand increased to 9.31 mbpd last week from 8.87 mbpd the previous week, ahead of the driving season.

The crude market is facing pressure from weakening fundamentals, and OPEC+ is expected to extend production cuts at their June meeting to support prices. The current policy mandates a crude oil production cut of approximately 3.66 million barrels per day for OPEC+ members, which will continue until the end of this year. Additionally, voluntary cuts amounting to 2.2 million barrels per day will remain in effect until June 2024. Any move to increase production could negatively impact prices significantly due to the delicate balance in the oil market.

In April, British inflation moderated, with consumer prices rising by 2.3% annually, down from a 3.2% increase in March. The monthly increase also slowed to 0.3% in April from 0.6% in March. Similarly, the US Headline Consumer Price Index (CPI) eased to 0.3% month-over-month in April from 0.4% previously, and the year-over-year increase was 3.4%, slightly down from 3.5% in the previous month. Energy prices in the US rose by 1.1% in April.

China and India, which together account for 20-22% of global annual crude oil demand, have shown signs of demand fatigue in recent months. In April, China’s oil imports declined by 8.8% month-over-month to 44.7 million tons. India’s imports also decreased by 5.8% to 19.86 million tons, or 4.85 mbpd, from 21.09 million tons in March. Any signs of improving demand from these nations in the coming months could support higher oil prices.

The minutes from the US Federal Open Market Committee (FOMC) meeting on May 1 revealed that some officials are prepared to raise interest rates further if inflation becomes more aggressive. Fed officials advised against rate cuts for at least a few more months, keeping the federal funds rate at a 23-year high range of 5.25% to 5.50%. This decision was unanimously supported by the FOMC voting members.

Given the current macroeconomic and geopolitical landscape, we expect oil prices to trade in a broader range of $75 to $80 per barrel unless there are significant changes. The bullish drivers for oil prices appear to be absent, and the solid supply fundamentals are keeping prices in check. The recent death of Iran’s president Ebrahim Raisi failed to prompt a rally, indicating that major supply-side disruptions are unlikely in the near term.

In conclusion, the oil market is likely to remain rangebound due to a lack of bullish triggers and steady supply fundamentals. Market participants should keep an eye on potential macroeconomic shifts or geopolitical events that could alter this outlook.

Jhumpa Lahiri

Jhumpa Lahiri

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