Oil prices surged during the first quarter of 2024 as the supply/demand outlook tightened and global geopolitical concerns intensified, pushing both U.S. and European benchmark crude futures to five-month highs.
Over the first three months of the year, WTI (West Texas Intermediate) futures contract rose by 16.1% closing at $83.20, while Brent crude rose 13%, closing the quarter at $87.50. WTI rose in every month of the first quarter, following three months of declines between October-December 2023.
According to the latest Crude oil forecast for the next weeks, prices may continue to rise during the second quarter, but they remain subject to the considerable near-term uncertainty.
The Fundamental Outlook
The OPEC + grouping, which consists of the Organisation of Petroleum Exporting Countries and its allies, has decided to prolong its production restrictions of 2.2 million barrels per day (BPD). Of course, Saudi Arabia is the group’s main power. Its voluntary one million BPD portion of the cuts is scheduled to remain in effect until the end of June.
The main cause of this year’s surge in oil prices is OPEC’s cuts. Maintaining them will provide the market with a lot of underlying support. However, OPEC is no longer quite the arbiter it once was, and the impact of production cuts within the cartel will be mitigated by supplies from outside of it.
Nevertheless, in December 2023, US oil production set a record. From there, it might be stuck there for the near future. OPEC might be more confident to continue with production cutbacks considering the possibility that they will be even more successful.
The Supply and Demand
Even though the major actors in the market cannot agree on the predicted extent of this, it is anticipated that overall petroleum consumption would increase. The International Energy Agency predicts a far more conservative 1.1 million BPD this year, compared to OPEC’s 2.25 million BPD. That is a noteworthy divergence in opinion.
Additionally, there are indications that Chinese demand is returning to its pre-pandemic state. The hold that inflation has on the industrial economies of the West is loosening, and central banks agree that interest rates have peaked. Lower interest rates and more affordable loans should be beneficial for the demand for energy.
However, caution is recommended. The conflict in Gaza and Ukraine will keep impacting the energy market in a variety of means. Russia is still subject to Western sanctions, and there seems to be a rise in Ukrainian attacks on its energy infrastructure. According to reports, JP Morgan has stated that the strikes have shut down 900,000 BPD of Russian refining capacity and might raise the risk premium on the world market by as much as $4/barrel.
The Charts
The US benchmark has scaled five-month highs at the beginning of April and is closing in on the 38.2% Fibonacci retracement level on its weekly chart. This has capped the market during the previous tests in September-October 2023.
A rise to that levels seems highly likely and would show a double bottom pattern with resistance (neckline) around the $90 for WTI and $95 for Brent. A double bottom pattern is a technical analysis charting pattern that characterizes a major change in a market trend, from down to up.
The direction of any test of the upcoming resistance levels is likely to be instructive, as could either drive prices $20 higher if confirmed, or towards the previous lows in case of a fake breakout.
WTI & Brent Oil Weekly Charts – Source: CAPEX.com
The Forecast and Price Predictions
The fundamental outlook for crude prices may remain modestly bullish, but the path higher is likely to be an uneven one.
According to commodities strategist at ING, rising concerns over tightening supply along with the persistent uncertainty in the Middle East continue to support the uptrend in speculative bets.
Because of falling inventories, EIA now expect the Brent crude oil spot price will average $88 per barrel in 2Q24, and they expect the Brent price will average $87/b this year.
Disclaimer: Please note this is no investment advice.
Featured image credit: Freepik
