Will we see a return of triple digit oil this year?
Oil prices have remained rangebound since erasing gains from Russia’s invasion of Ukraine late last year.
For most of last year, fears of a major oil supply shock from Russia dictated market sentiment and trader positioning. But even after the EU embargo and the entry into force of the G7 price caps for Russian crude oil and petroleum products, oil prices did not rise.
Russia is shifting its oil exports to Asia, while Europe is buying more crude and products from the Middle East, Asia and the United States.
Yet one of the most significant shifts in global oil trading in decades has not been the primary driver of oil markets in recent weeks.
It’s the economy. Inflation, manufacturing, employment and business activity data from the United States and China – the world’s two largest economies – are currently the main drivers of the oil futures market.
The Fed is closely monitoring every economic data point in the United States to gauge whether to accelerate or slow the pace of rate hikes. Stronger US economic data and still-high inflation could prompt the Federal Reserve to hike interest rates more than originally expected, increasing the likelihood of a significant slowdown and even a recession in the coming months.
On the other hand, markets – including the oil futures market – are closely watching economic trends in China, which has reopened after almost three years of zero Covid lockdowns and is expected to see a rebound in economic growth and oil consumption this year.
These two opposing economic forces are currently pulling the oil market in opposite directions, keeping prices stuck in a tight range of $80 to $85 per barrel Brent.
“The market has been range bound for months and is in no hurry to change that amid a balanced stream of supply and demand related news and is likely to rank with the broader level of risk appetite currently dictated by the FOMC and its close attention Pay attention to incoming data”, Saxo Bank called this week just ahead of Friday’s US jobs report.
Adjusted for inflation, oil prices have fallen 40% in a year since March 8, 2022, a peak weeks after Russia invaded Ukraine, according to Reuters senior market analyst John Kemp Remarks. Additionally, price volatility in the front-month contract has fallen to an annualized rate of less than 25%, down from 88% in March last year.
Rate hikes and concerns about a possible slowdown in the US economy are dragging oil prices lower.
“Slowing growth continues to weigh on crude oil prices, but if fears of a hard landing in the US economy are eased, WTI crude could find a home above $80 a barrel,” said Ed Moya, senior market analyst, The Americas OANDA. called on Thursday.
At the same time expectations of a Chinese economy and oil demand rebound limit the downside. If China rebounds strongly after reopening, prices could breach the recent tight range given global inventories are below five-year averages and signs of a tighter physical crude market are emerging.
A soft landing for the US economy could soon see prices hit $90 a barrel, say some of the world’s biggest physical oil traders.
Trafigura expects prices to rise due to the big shifts in oil trading over the past year, according to its co-head of oil trading, Ben Lucock called at the energy conference CERAWeek this week.
According to Lucock, the Chinese recovery is “real” as Trafigura sees rising demand for minerals and metals and the amounts of crude oil China has imported over the past six weeks, the executive said, as published by The Wall Street Journal.
oil prices could reach the $90-$100 per barrel in the second half of this year as global demand is set to hit record highs while supply remains limited, Russell Hardy, CEO of the world’s largest independent oil trader Vitol Group, said told Bloomberg Television last week.
As the Russian invasion of Ukraine and its impact on supply and energy markets continues to hang over the oil market, the economies of the United States and China are dictating current price trends and will determine where prices will go if they break out of the current range .
By Tsvetana Paraskova for Oilprice.com
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