WTI price recently popped above the $80/bbl once again. This time it was a more convincing move that could suggest the price is solidly back to November levels. The move higher came in the wake of the US Department of Energy reporting a surprise drawdown of 5.5 million bbls for inventories.
Though the price of US-based crude has been a bit of an unusual situation over the last month. In February, a key refinery in Indiana went offline, taking almost half a million bbl/day of capacity off the grid. As a result, there was an increase in gasoline prices (fueling the recent inflation numbers) and inventories. That refinery was expected to ramp back up to full production through the course of this month.
Where’s Demand going?
One of the things that is getting in the way of forecasting where WTI price could be growing is the widening in forecasts from the premier agencies involved in trade: The IEA and Opec. The difference in market outlook between the two has become the widest since the sub-prime crisis, and has gotten the attention of analysts. Both offer different scenarios that imply drastically different crude prices for this year.
The IEA suggests that demand will have a slower recovery in 2024, due to lack of global economic growth. But some have wondered if the Agency’s focus on energy transition has seeped into the forecasts suggesting that less oil will be needed. OPEC, as an oil-producing cartel, naturally has a bias in favor of more production. And, unsurprisingly, it says that oil demand this year will be 1 million bbl more than the IEA does. OPEC bases its assessment on an assumption that the Chinese economy will do better, which will prompt increased demand from the world’s largest importer.
So, What About Prices?
This is where things could be a little concerning for oil bulls. The IEA forecasts that the average price for crude this year will be between $75 and $78 per barrel, below the current price. While the Agency does acknowledge there is a supply crunch, with demand expected to exceed production this year, it suggests that it won’t affect WTI price so much. After all, OPEC has continued to exceed its production targets as countries look to refill their coffers.
OPEC is expected to extend its production cuts next quarter, in order to keep the price higher. The main proponents of the cuts, Saudi Arabia, which alone has curtailed 3 million bbl/day of production, has said that price dynamics have “rationalized” recently. That is, as the price of crude has trended towards $80/bbl, suggesting that might be around a target for the Kingdom.
Potential Disruptions?
The price of crude has been in a relatively narrow channel over the last couple of weeks, despite the geopolitical events. The recent refinery fires in Russia have been offset by increased production in Libya. The dollar has fluctuated as it seems that inflation is hotter than anticipated, but traders are still betting on a rate cut.
If the market has priced in too much easing from the Fed, it could end up putting a cap on the price of crude. More aggressive monetary policy would likely weigh on the world’s largest economy, and comparatively strengthen the dollar. That could ultimately have a bigger impact on the price than whether the IEA or OPEC is closer to the money on the demand forecasts.
