Forex Trading Library

Is That It for WTI?

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Oil price has  had something of an anticlimactic evolution lately. But that hasn’t stopped various brokers and analysts from upgrading their expectations for crude this year. Heading into the busy summer demand season, it’s not just Middle East tensions that can be pushing energy costs going forward. Constrained production and increasing demand are expected to add to a growing supply shortage.

But not everything is aligned with the oil bulls. Geopolitics can change quickly, and the latest market moves suggest that investors are still worried that high interest rates will keep risk appetite low. Even the better data out of China shows some concerning signs.

The Tension Breaks

Last Friday, WTI hit a six-month high as the market waited on tenterhooks for Iran’s long-expected retaliation against Israel. But the Islamic Republic’s barrage of missiles were mostly all shot down, preventing any serious harm to Israel that would have potentially prompted an escalatory response.

Although Israel has said it might respond, most analysts are coming to the conclusion that the incident is following the same pattern as the death of Qasim Soleimani back in 2020. At that time, Iran launched a barrage of missiles at a US military base with minimal casualties in a show of force. The attack was widely telegraphed, allowing Coalition forces to evacuate and take cover. After the “show of force”, the US didn’t further respond and the situation did not escalate. Given the lack of material damage to Israel, that seems to be the likely outcome here.

But the Price Isn’t Coming Down

Although oil price came off the six-month highs they hit last Friday, they are still elevated. Tensions in the Middle East might be easing, but they haven’t gone away. At the same time, China’s Q1 GDP came in above expectations, suggesting that demand from the world’s largest crude importer will remain healthy. That has prompted some analysts to revise higher their forecasts for crude, with Bank of America saying it will be around $95/bbl this year.

Other Factors that have inclined the balance to the upside include the recent affirmation of production curtailments by OPEC plus, despite the higher oil  price . OPEC and the IEA disagree on just how much of a supply shortfall there is, but they both agree that demand will increase faster than supply in the coming months. With OPEC expected to keep production limited, this situation could be exaggerated.

But There Are Some Warning Signs

Before getting too carried away with the upward bias, there are some concerning bits of data among the otherwise strong headlines. For example, China’s industrial capacity use is at the lowest level since the beginning of the pandemic. Stimulus spending in the Asian giant has helped increase its GDP, but that doesn’t mean it will translate into demand if its factories aren’t ramping up production.

As the US moves into the summer driving season, the already higher prices at the pump are pushing inflation higher. That could cut back demand from seasonal drivers, and higher interest rates could sap economic growth in the largest oil consumer.

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