Forex Trading Library

The Oil Price Rollercoaster: Disagreement in the Forecasts

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Oil prices have been on a bit of a roller-coaster lately. Falling to four-month lows in early June, then rebounding. The price dropping after OPEC+ affirms its plan for production cuts, rising after the dollar ends up a little stronger. It’s all a little confusing.

Part of the problem could be that established analysts are at odds about where they think the oil price will go. Morgan Stanley, for example, thinks that Brent will move up to $86/bbl sometime by the third quarter of this year. Citi, on the other hand, is forecasting oil to crash below $60/bbl. Who’s right? Why so much disagreement? What’s going on?

The Timing Issue

Getting a handle on how the oil price  could behave in the current circumstances depends a lot on what time-frame you’re thinking of. The consensus is that the world is moving away from fossil fuels, which will reduce demand for (and the price of) oil. On the other hand, expecting this drop in demand, there has been a lack of investment in developing new oil production. Oil demand is expected to increase in the short term, which could lead to a supply crunch. When? Well, that’s where the analysts are all disagreeing.

The conventional thinking leads to arguments in favor of the oil bulls. That is that the US economy is strong, and so is its demand for oil. China is expected to grow its economy this year, and also increase its oil buying. With production around current rates, demand would outstrip supply, and prices would remain elevated.

The Known Unknowns

The dissenting view among analysts, but given the drop in the price of crude, could be the majority view among traders. That is based on slow demand from China, and American drivers generally staying off the road this year due to the effects of inflation. That is compounded by a closer look at the OPEC+ decision to keep formal cuts in place, but allow for voluntary cuts to be phased out.

That latter is significant, because global demand is expected to increase by about 1 million bbl/d this year, but Saudi Arabia alone has 3 million bbl/d in its voluntary cuts, meaning that there is enough global capacity (if not current supply) to meet the expected demand. Analysts argue that the main countries doing the curtailments – Saudi Arabia and Russia – are in need of cash, and they can only get that by selling more oil.

The Black Swan

All of the preceding supposes a growing global economy as interest rates among major economies come down, and inflation comes under control. But we aren’t completely out of the woods when it comes to a sudden recession. The yield curve is still inverted, and the lack of demand being seen for a vital resource such as energy could be a sign that the economy is vulnerable to a downturn. That would drag down the price of crude substantially more than what the bears are forecasting.

For the upside, on the other hand, it would take an unexpected extraneous event. The last time crude prices went into triple digits, it was in the wake of Russia’s invasion of Ukraine. The most recent high was in the wake of the October 7 attacks on Israel. Geopolitical events of that magnitude are hard to predict.

Crude prices, therefore, could end up fluctuating quite widely in the coming months before either the bullish or bearish narrative gets firmly established.

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