In the most recent survey of economists conducted by Reuters, the average price of crude for this year was raised once again. This follows a month of massive drawdowns in US inventories, including the largest one ever at the start of August. With demand expected to increase, and OPEC+ expected to keep production cuts in place, how high can crude go?
Economists had initially expected that China’s post-pandemic rebound would help push the price of crude higher. It is, after all, the largest importer. China managed to keep imports elevated all the way through June. But when the international price of crude moved above $80/bbl, Chinese imports were seen slacking off.
It’s a price-sensitive environment
In fact, China cut imports in July by over $2M bbl/day, which more than offset the production cuts from Russia and Saudi Arabia that totaled 1.5M bbl/day. Meanwhile, the US saw increasing demand for refined fuel. US refiners pushed production to the highest level since before the pandemic, and that led to an unexpected drawdown on inventories.
The US has been slow to replenish its reserves, as well. The White House had initially suggested that if WTI prices fell below $70/bbl, then it would start replenishing the SPR, which has fallen nearly by a half. Yet even as prices fell, the US government was hesitant to buy. The government continued to sell from the reserves all the way into August.
Where prices are expected to go
Economists are now thinking that the slowdown in China will be offset by stronger growth in the West. Specifically, the US is expected to avoid a recession now, unlike earlier in the year when the vast majority of economists forecasted a hard landing. A slowdown in inflation, and relatively steady prices at the pump has renewed confidence in US consumers. US drivers are seen returning to the roads in levels similar to the pre-pandemic level. That has lifted demand for gasoline above the level from last year when higher prices caused Americans to drive less.
The poll of Economists now sees Brent averaging $82.45/bbl this year, which is up from the $81.95 forecast the last time the economists were polled. With the average so far this year down around $80.60, that implies crude prices would be higher than the average by the end of the year.
The latest moves
Crude prices have clocked six consecutive daily rises recently, driven by a growing narrative that the Fed is done with rate hikes. This has put downward pressure on the dollar, as well as supported hope for economic growth in the world’s largest economy. Additionally, China recently announced another round of stimulus measures, including cutting its reserve requirements ratio. That’s equivalent to a rate cut by the PBOC, which is hoped to stimulate demand from the world’s largest crude importer.
Additionally, late on Thursday, Russia’s deputy PM Alexander Novak said that he’d reached an agreement with OPEC+ on more “action” by the cartel. The details of the agreement will be released next week when members meet again to discuss potentially more production cuts to prop up the price.
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