March 28, 2024 [Oilprice]- After months of skepticism, traders seem to have finally realized that OPEC+ is serious about keeping crude oil supply constrained.
Per the latest weekly data from Reuters, as reported by market analyst John Kemp, traders are buying oil at the fastest rate since 2020. And oil prices are on the rise.
Of course, OPEC is not the only factor behind the change in sentiment among traders. Refinery disruptions in Russia resulting from Ukrainian drone attacks have also had a lot to do with the growing bullishness on oil markets. Recent reports that the U.S. had urged the Ukrainians to stop targeting Russian refineries and the Ukrainians’ refusal to do so probably reinforced the effect, too.
There is also the improvement in analysts’ outlooks for the global economy. The picture seems to no longer be as bleak as it was last year, so oil demand projections are improving. A month ago, the International Monetary Fund revised upwards its forecast for the global economy, and so did S&P Global Market Intelligence. So traders are once again buying oil in significant volumes.
According to the Reuters numbers, in the week ending March 19, traders bought the equivalent of 140 million barrels across the six most traded crude and fuel contracts. Crude was the most bought, with 57 million barrels in West Texas Intermediate changing hands during that week along with 55 million barrels of Brent crude.
“Escalating geopolitical tension, coupled with a rise in attacks on energy facilities in Russia and Ukraine, alongside receding ceasefire hopes in the Middle East, raised concern over global oil supply,” Nissan Securities analyst Hiroyuki Kikukawa told Reuters in comments on the latest movements in prices.
Yet while geopolitical factors play a big role in day-to-day price swings, the OPEC+ cuts normally have a longer-term effect-once it kicks in, and this time, it took a while.
Saudi Arabia first announced in July that it would reduce the amount of oil it supplies to global markets. Some saw it as insignificant, while others dismissed it as a desperate attempt to prop up the unproppable as prices remained stubbornly stuck within a narrow range below $80 per barrel.
Yet later, the rest of OPEC and its Russia-led partners also joined the Saudis-and prices still remained locked in their range. The factors that kept them there were the same that are now fueling the rally: a pessimistic outlook for the global economy, geopolitical tensions that weren’t affecting oil supply, and general skepticism about demand in the era of the energy transition.
The tide only began to turn this year as the outlook for global GDP began to change, with the first data about 2023 starting to come in. In some places, things were as bad as they seemed, such as the eurozone. In other parts of the world, however, such as the United States, the economy performed better than most expected, sparking hope that this year could be better still. And that shifted traders’ attention from demand to supply.
There had been warnings about shrinking oil inventories amid the OPEC+ cuts but those got little attention until the change in economic outlook. Now, there’s suddenly concern about a deficit that even the IEA acknowledged, after a month ago confidently stating that the oil market was comfortably supplied.
So now prices are on the rise again and Morgan Stanley has already forecast that Brent will hit $90 per barrel later in the year. “Every month that OPEC discipline remains in-place, Brent flat price will likely continue to catch up with where inventories and time spreads already are,” the bank said. It’s safe to say that OPEC discipline will remain in place for quite a while yet.
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