The jump in oil prices observed on Friday was followed through yesterday in what was proved to be a quiet session due to bank holidays both in the US and in the UK. Despite the undisputably brighter mood seen in the last two days interest rate concerns will most plausibly act as a break on further attempt to send oil prices meaningfully higher in the immediate future. No doubt the April US personal consumption expenditure index, a major Fed proxy for inflation, due out on Friday will have a profound impact on rate views and on the dollar. Both the core and headlines readings are expected to come in unchanged from March at 2.8% and 2.7%, respectively. There is a growing belief that the ECB and maybe the BoE will cut interest rates before the Fed, supporting the dollar, and causing headwinds for oil’s advances.

This coming weekend the OPEC+ producer coalition will decide on the best course of action for coming months and possibly for the whole second half of the year and given that the discussions will take place in the cyber space it is a fair assumption that no changes in production levels will be forthcoming. The horrendous Israeli air strike over the weekend on a Palestinian refugee camp in the southern Gazan city of Rafah, which reportedly killed 45 people, including women and children serves as a stark reminder that although the Near East conflict has not impacted the region’s oil supply drastically, truce between the warring parties is hastily slipping away.

Ameliorating Prospects for 3Q

Ultimately there is always a consensus. Of course, it is only in retrospect and the path towards these converging views is paved with statistics. Forecasts can greatly vary, aftercasts are usually aligned. In January 2023 estimates for end-year OECD oil inventories stretched from 2.719 billion bbls from the IEA to 2.892 billion bbls, according to the EIA, with OPEC’s projection at 2.815 billion bbls. Last month’s updated oil balances showed a spread of a mere 4 million bbls. The IEA and OPEC agreed that oil stocks in the developed part of the world bode farewell to 2023 at 2.777 billion bbls with the EIA putting the figure at 2.773 billion bbls. These constant revisions are entirely understandable. Surveying past data relies on one major variable: accurate reporting. Predicting stocks months, quarters and years ahead is much more complex and cumbersome. Economy, politics, supply and demand, all have to be prognosticated not to mention the ungrateful task of guesstimating OPEC+ production levels.

The latest gauge on OECD inventories, which inversely correlate to oil prices, for the first and the incumbent quarter of 2024 are almost reassuringly harmonious. They range from 2.734 billion bbls to 2.793 billion bbls for the first three months of the year and the gap between the highest and lowest estimates are seen at 26 million bbls in a 2.731-2.757 billion bbls range in 2Q. No doubt, these numbers will be amended going forward, nonetheless, the point is that some kind of agreement amongst the three salient forecasters are being reached. Should this unanimity persist in the upcoming quarter life would almost become boring for any analyst attempting to come up with a price prognosis.

Before we dive into the outlook for 3Q 2024 it is imperative to establish that the second quarter of the year is proving disappointing concerning oil prices. There is palpable fundamental explanation behind the price drop experienced between mid-April and end-May, which pushed the price of Brent from $92.18/bbl to $80.65/bbl, high to low. All three agencies downgraded their 2Q demand projections from April to May. Estimated global and OECD inventories, consequently, were revised up. These amendments are most prominent in the changes OPEC effectuated. The daily global stock draw of 1.8 mbpd it had foreseen in April was reduced to 1 mbpd a month later. No wonder then that those running length felt compelled to liquidate, at least part of their positions.

Interestingly, 3Q consumption data did not undergo any downside revision, in fact and on average, it saw a rise of 60,000 bpd month-on-month. This is undeniably an auspicious development bulls can and probably will take heart from. Seasonal demand patterns also favour them. As the driving season, followed by the period of harvest, approaches on the northern hemisphere both gasoline and diesel consumption usually increase, whilst jet fuel demand is also supported by the rise in holiday travels. The quarter-on-quarter growth in global oil demand is 1.12 mbpd when taking the mean of the three predictions, an improvement of 240,000 bpd from April. At the same time, non-OPEC and /or non-DoC supply is expected to climb less than consumption leading to a higher call on OPEC/DoC oil and resulting in declining inventories worldwide as well as in OECD countries.
Boldly or not, a case for calling for a bottom is building, not so much pricewise but timewise. The moment refiners suspect a rise in consumer and industrial demand their thirst for crude oil will tangibly increase leading to stock depletion and deepening of backwardation. As product demand ascends crack spread values will also improve. 

There are, nonetheless, strong strings attached to the above view. Firstly, OPEC+ must not increase output in 3Q and must show determination to rein in overproduction when they meet virtually scheduled for Sunday, June 2 – anything else is pernicious for the global oil balance and even a rollover might have a delayed price impact. Secondly, financial supply and demand will ostensibly be affected by interest rates (non) decisions. Unless all hell breaks loose in the Middle East and serious supply disruptions send prices spiralling out of control this year’s high are unlikely to be challenged seriously but might well be approached come July or August.

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