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The future of oil prices: Is it the calm before the storm?

Today's market analysis on behalf of Rania Gule Market Analyst at XS.com

 

May 17, 2024 (Investorideas.com Newswire) Crude oil prices (WTI) rebounded from their lowest level in eight weeks recently, starting Friday's trading at $79.30, driven by a surge in risk appetite in the market following a decrease in inflation in the US Consumer Price Index (CPI). This fueled further market hopes of a Federal Reserve interest rate cut. With expectations of over a 70% likelihood of a rate cut in September, crude oil rose.

According to the Energy Information Administration (EIA), the change in crude oil inventories decreased faster than expected every week, dropping by -2.508 million barrels, less than the anticipated -1.35 million. With the weekly decline in US crude oil reserves, buying interest in crude oil barrels found further support, as energy markets look for signals that US crude oil production will fail to meet market demand.

From my perspective, after oil prices dipped below $78 on Wednesday, significant downward pressure persisted, taking into account all geopolitical events and data currently. Alongside the delicate balance in the Middle East and the Red Sea, recent OPEC and International Energy Agency reports also paint an unclear picture of the market's future, with the IEA lowering its oil demand forecasts and OPEC sticking to its previous forecasts. With the future outlook not clear enough, a longer-standing stance by the US Federal Reserve delaying the initial interest rate cut implies increased demand.

Meanwhile, the US Dollar Index (DXY) is declining further below 105.00 after the US CPI reading, which markets were convinced would be lower than previously expected after the Producer Price Index (PPI) release on Tuesday showed downward figures across the board in both the core and headline PPI. With the return of the CPI to its contractionary path, more dollar selling could occur in the coming days.

Ahead of the upcoming OPEC meeting, the group ordered an external review to determine each member's production capacity, and Mexico lowered its prices to purchase Maya Oil for Gulf Coast refineries. Reports from the International Energy Agency indicate global consumption will rise by 1.1 million barrels per day this year, 140,000 barrels less than a month ago.

The Energy Information Administration also released weekly changes in US crude oil inventories, with the previous week showing a drawdown of 1.362 million barrels, while a significant drawdown of 2.508 million barrels exceeded the expected 1.35 million. All these varying conditions add further pressure on energy and crude oil prices in the long and medium term, which could draw strength in the short term from interest rate cut expectations and any developments in the severity of geopolitical events in the Middle East.

I anticipate oil prices collapsing under the current pressure, especially with the Federal Reserve's longer-standing interest rate stance. Federal Reserve Chairman Jerome Powell reaffirmed this position on Tuesday during a speech in Amsterdam. This means that an increase in demand from the United States will likely not occur until after summer at the earliest, so crude oil is unlikely to break above key significant levels as long as demand does not surpass supply.

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