Oil extends gains on softer US inflation; OPEC upbeat on 2024 demand growth

Brent crude futures were up 20 cents to $80.31 per barrel while US West Texas Intermediate crude futures were up 11 cents at $75.86. The premium of a front month Brent contract to a six-month February 2024 contract rose to $2.64 a barrel on Wednesday. 

At the end of the June, the front month contract was at a discount to the six month contract. The futures contract structure of the global benchmark Brent indicates the market is tightening and that OPEC+ could be succeeding in its aim to support the market.

Brent crude is at two-month high levels, points away from its April peak of $83.95/bbl – the biggest rise in more than a year, after the Organisation of Petroleum Exporting Countries (OPEC) and its allies, called OPEC+, announced oil production cuts of 1.16 million barrels per day (bpd) in a surprise decision.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a July 19 expiry, was last trading higher by 1.05 per cent at ₹6,278 per bbl, having swung between ₹6,185 and ₹6,299 per bbl during the session so far, compared to their previous close of ₹6,213 per bbl.

On fresh uptrend: Why are oil prices extending gains?

Brent crude breached the $80 per barrel-mark for the first time since May over growth optimism and tighter market. Oil prices have now rallied by around 12 per cent in two weeks, primarily in response to supply cuts from top producers Saudi Arabia and Russia. Top producer Saudi Arabia pledged last week to extend a production cut of 1 million bpd in August, while Russia will cut exports by 500,000 bpd.

Data released on Wednesday showed US consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside. Easing inflation in US provided a boost to prices as it lowered rate-hike concerns on markets. The US dollar too slumped to a 15-month low. A weaker dollar makes commodities priced in the currency more attractive for foreign buyers. 

However, oil is still down this year as traders continue to watch for signs of recession in the west —even amid the improving US outlook — while waiting for China’s recovery to pick up.

IEA trims oil demand forecast this year

In the latest insights on the supply-demand balance, a report by the International Energy Agency (IEA) on Thursday predicted oil demand would hit a record high this year, but that broader economic headwinds and interest rate hikes meant the increase would be slightly less than previously anticipated.

The IEA now sees oil demand rising by 2.2 million barrels per days (mbd) this year, down from its previous forecast of an increase of 2.4 mbd. The Paris-based organisation which unites energy consuming nations, expects global demand to hit a record 102.1 mbd this year.

China will account for 70 per cent of the global demand increase even though the rebound in its economy has appeared to falter. “China’s oil demand remained robust despite rising unemployment, renewed property market stress and a general slump in business and consumer sentiment,” said the IEA in its regular monthly report on oil markets.

Central banks in leading industrial nations have jacked up interest rates in an effort to bring down inflation, but the higher borrowing costs suppress economic activity and risk provoking recessions that would lead to a drop in oil demand. Such concerns have kept crude prices in check even though Saudi Arabia and fellow OPEC cartel nations along with their allies have limited or even cut output for the past year.

Their cuts have been largely offset by higher output from other producers, with oil supply still outpacing demand. But the IEA warned “the oil market may soon see renewed volatility” as demand outpaces supply. It noted global supply could tumble by more than 1 mbd this month as Saudi Arabia implements steeper cuts.

An IEA graph forecasts the oil market shifting from balance in the second quarter to demand outstripping supply for the rest of the year, with the draw on stocks hitting roughly two million barrels per day in the coming months.

OPEC upbeat on 2024 demand growth

OPEC on Thursday maintained an upbeat world oil demand outlook despite economic headwinds, raising its growth forecast for 2023 and predicting only a slight slowdown in 2024 as China and India continue to drive the expansion in fuel use.

In a monthly report, the Organization of the Petroleum Exporting Countries (OPEC) said it expects world oil demand to rise by 2.25 million barrels per day (bpd) in 2024, compared with growth of 2.44 million bpd in 2023. It raised its 2023 demand growth forecast by 90,000 bpd from last month’s report.

In China, however, momentum in the post-pandemic recovery slowed with exports contracting last month at their fastest pace since the onset of the pandemic three years ago, the country’s Customs Bureau showed on Thursday.

The report also showed OPEC’s oil production rose by 91,000 bpd to 28.19 million bpd in June, led by Iran and Iraq, despite output cuts pledged by OPEC.

The US Energy Information Administration (EIA) cut its forecast for 2023 US crude oil production by 50,000 bpd after the OPEC+ extended output cuts through 2024. Crude oil production is expected to rise 670,000 barrels per day (bpd) to 12.56 million bpd this year, less than a prior forecast calling for a gain of 720,000 bpd, the EIA said in its Short Term Energy Outlook.

The IEA and EIA both maintaining a robust outlook for demand signals support for prices as markets tighten in the coming months.

Updated: 13 Jul 2023, 07:51 PM IST