The world’s top commodity traders and analysts are increasingly confident of a bullish oil market into the second half of the year after Brent crude prices pierced $90 per barrel for the first time in months. The elevation in crude prices comes after the Organisation of Petroleum Exporting Countries and its allies (OPEC+) kept its output policy unchanged till mid-2024 and pressed some oil producing nations to adhere to the output cuts put in place for this year.
Following OPEC’s stance, the views of leading trading houses have shifted markedly in just a few weeks. Morgan Stanley hiked its Q3 Brent crude outlook by $4 to $94 over geopolitical conflicts, while analysts see a supply deficit of one million barrels per day (bpd) in 2024 due to the prevailing OPEC cuts.
Also Read: Morgan Stanley hikes Q3 outlook to $94 on geopolitical tensions as Brent hovers over $90/bbl
Brent crude is currently trading near a five-month high as strong supply-demand fundamentals combine with a significant dose of geopolitical risk due to the ongoing war in the Middle East. However, some analysts are also saying that crude prices will remain elevated in 2024 even if Middle East geopolitical tensions cool down due to the market deficit and supply tightness.
Oil traders expect market tightness over high demand in 2024
Russell Hardy, chief executive officer of Vitol Group, the world’s largest independent trader, said his firm now expects demand growth of 1.9 million barrels a day this year — that’s more than 30 per cent higher than the current view of the International Energy Agency, which acts as the industry standard.
If achieved, that figure would almost match the growth from 2023, which was unusually high as the world continued to emerge from the COVID-19. Rivals Trafigura Group and Gunvor Group also expressed optimism around demand, citing strong global economic growth and robust recent data respectively.
“We are on track to have an extremely tight global oil market,” Sebastian Barrack, head of commodities at hedge fund Citadel said on Monday at the FT Commodities Global Summit. “OPEC has definitely regained control.”
Oil prices will stay high – even if Middle East tensions cool
Oil prices are likely to remain high for the foreseeable future and investors should position their portfolios accordingly, say oil market analysts. Brent crude prices are likely to stay elevated even if Middle East geopolitical risks fade away.
Experts note that while fears of escalating conflicts in the Middle East, including between Israel and Hamas, a potential Iranian retaliation, and attacks on cargo ships in the Red Sea have played a significant role in propelling oil prices upward, the economic growth dynamics in key regions like the US, Europe, and China are also exerting substantial upward pressure on demand.
“These three economic powerhouses are witnessing robust growth trajectories, further intensifying the global appetite for oil. This surge in demand is likely to provide a strong support pillar for oil prices, irrespective of developments in the Middle East,” said Nigel Green, CEO, deVere Group.
Through coordinated production cuts and gradual increases in output, OPEC+ has effectively constrained supply, preventing an oversupply scenario that could have otherwise dampened prices. ‘’This strategic maneuvering by OPEC+ has been instrumental in maintaining a delicate balance between supply and demand, thereby supporting elevated price levels,” notes the deVere CEO.
The market expert concludes that the economic growth in the three key global regions, plus OPEC+ strategies, will keep oil prices higher for some time, regardless of what’s happening in the Middle East.
What will happen if Brent hits $100/barrel?
The focus will now turn back to OPEC+, which will decide in June whether to bring barrels back as prices climb. Vitol’s Hardy said he expects that if crude strays beyond $100 a barrel the market will start to see demand destruction, as well as a supply response from the producer group. “$80 to $100 feels a sensible range,” he said.
deVere CEO Nigel Green also added that in the current environment and momentum, “we cannot rule out $100 a barrel.” He suggests that strategic portfolio positioning becomes paramount for investors amid high crude prices.
Investors should adopt a diversified approach, according to the expert. The allocation of resources across sectors that benefit from economic growth, such as technology, industrials, and consumer goods could help investors.
“Within the energy sector, prioritize investments in companies with robust fundamentals and resilient business models. Look for entities with low production costs, strong balance sheets, and diversified revenue streams. Such companies are better positioned to weather market volatility and capitalize on favorable price environments,” he said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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