Oil prices have recently experienced their third consecutive weekly drop, the longest losing streak this year. Nevertheless, market observers expect this trend to reverse soon. Ed Morse, Citi's Global Head of Commodities Research, believes oil prices have reached their lowest point, with several indicators supporting this claim.
During the first two months of the year, inventories increased substantially but have since dropped, signaling that the market has reached its lowest point. Additionally, the consequences of the recent OPEC+ production cuts are being felt in the markets, as the world enters a period of higher demand. Last month, OPEC+ declared a reduction in output by 1.16 million barrels per day, which will last until the end of 2023. Despite warnings that prices could skyrocket to triple digits, such a surge has not occurred.
Morse is more optimistic about the second and third quarters than the first. Likewise, financial services firm ANZ suggests that the oil price decline could soon reach its nadir. They expect global oil demand to grow by 2 million barrels per day, keeping the market under-supplied throughout 2023.
A report from May 8 indicated that OPEC+ output cuts and a rebound in China's demand could counterbalance slower demand in other regions, leading to a bottoming out of oil prices. Goldman Sachs has also maintained its forecast for higher crude oil prices in the future.
As of Monday, global benchmark Brent was trading 1.74% higher at $76.61 per barrel, while U.S. West Texas Intermediate futures were 1.92% higher at $72.71 per barrel.
Several economic factors have contributed to the recent slump in oil prices. Last Wednesday, the U.S. Federal Reserve raised interest rates by a quarter of a percentage point, sparking investor concerns that slowed economic growth could negatively impact energy demand.
Moreover, an unexpected decline in China's April manufacturing activity cast doubt on the recovery of the country's commodity demand. Commonwealth Bank of Australia noted that the expectation of tightening oil markets later this year due to increased Chinese demand is being called into question.
According to CBA's Vivek Dhar, a tightening oil market in H2 2023 will depend more heavily on OPEC+, particularly Russia. Surprisingly, Moscow's oil production has proven more robust than anticipated, despite its announced production cut of 500,000 barrels per day.
