Front-month ICE Brent has inched upwards by $0.40/bbl on the day from Friday, to $83.93/bbl at 09.00 GMT.
Upward pressure:
The International Energy Agency (IEA) has forecast China’s oil demand to grow by over 900,000 b/d this year, and Goldman Sachs commodity strategists think it will grow by an even higher 1 million b/d. This could lift Brent by “roughly $15/bbl,” Goldman Sachs said.
“World oil supply looks set to exceed demand through the first half of 2023, but the balance could quickly shift to deficit as demand recovers and some Russian output is shut in,” says the IEA. It predicts that Saudi Arabia and the UAE will have a combined “thin spare capacity cushion” of 3.4 million b/d despite seeing record production this year.
The IEA’s warning echoes the concern expressed by Saudi Aramco’s chief executive that the existing “low global spare capacity” will shrink as global demand led by China increases.
“One major upside risk to [oil] prices remains China and its recovery from the transition to living with Covid,” says Craig Erlam, senior market analyst at OANDA. He adds that the Russian output cut is likely to “double later in the year.”
Downward pressure:
On the flip side, the IEA expects non-OPEC+ producers to step in to fill the supply gap left by Russia and OPEC. “For the year as a whole, global oil supply is forecast to expand by 1.2 million b/d, led by the US, Brazil, Norway, Canada and Guyana – all set to pump at record rates.”
The tug of war between inflation and the US Federal Reserve’s (Fed) interest rate hikes remains a metaphorical chink in Brent’s armour. The Fed is expected to continue raising interest rates to rein in inflation. Increasing interest rates can increase borrowing costs, which may lead to a decrease in Brent crude oil demand.
“Sizzling” core inflation readings in the US “crushed hopes for a tidy melt in inflation,” writes Stephen Innes, managing partner of SPI Asset Management: “A ferocious recovery in January retail sales sequestered thoughts of a meaningful economic cooldown.” He adds that the Fed is not expected to cut interest rates until there is a “growth risk”.
Source: Engine