In July, global crude oil prices have fallen short of expectations for market bulls. Despite hopes for higher prices, many in the bullish camp don’t see the current $85 per barrel for Brent crude as high enough under current market conditions.
While the talk of crude oil hitting $100 per barrel faded in the second quarter, the new target for the third quarter is $90 per barrel. However, Brent futures have struggled to stay above $85 and even dipped below $80 after the recent OPEC+ meeting.
In June, the Russia-led group of oil producers and OPEC, led by Saudi Arabia, began to gradually reduce their additional output cuts. This led to a wave of short-selling, but it didn’t last long as Brent futures settled back into the $80 to $85 range. So, could prices really spike to $90, and what factors may drive that increase?
5 Factors That May Usher In $90 Oil Prices
Several factors could push Brent crude to $90. First, we're entering a peak demand period with the Northern Hemisphere’s summer driving and jet fuel needs, particularly in the U.S., where a possible interest rate cut by the Federal Reserve could boost consumer confidence and fuel demand.
Second, a weaker dollar, spurred by interest rate cut expectations, can significantly impact the global oil market, particularly for emerging markets.
For emerging markets, where oil imports are often a substantial portion of their energy needs, a weaker dollar can lead to increased buying activity. These countries might seize the opportunity to purchase more oil at a lower cost, thereby boosting demand in the global market. This increased demand, in turn, can contribute to higher oil prices, potentially pushing Brent crude towards the $90 mark, making it more affordable.
Moreover, as emerging markets buy more oil, this can also alleviate some of the supply glut that might exist in the market, further supporting price increases.
Third, after a slow start to the year and GDP growth below 5%, many expect economic stimulus from China following its Third Plenary meeting, which could boost crude oil demand. This would offer support to oil bulls who have so far relied mainly on India’s strong demand among major global importers.
Fourth, although OPEC+ is gradually rolling back its additional cuts of 2.2 million barrels per day, the group will keep 3.66 million bpd off the market until the end of 2025. Saudi Energy Minister Prince Abdulaziz bin Salman has hinted that OPEC+ might pause or reverse these cuts if demand doesn’t pick up in the second half of the year.
Finally, the global geopolitical situation is tense. The ongoing Israel-Hamas conflict in Gaza and related regional tensions, such as attacks on commercial shipping by Iran-backed Houthi rebels and skirmishes between Israel and Hezbollah, create significant uncertainty. Additionally, the Russia-Ukraine war continues, with Ukrainian forces targeting Russian oil and gas infrastructure.
5 Reasons Why Brent Probably Won't Hit $90.
Despite several factors that could potentially drive Brent crude to $90 per barrel, reaching that level may still be challenging.
Firstly, China's upcoming economic stimulus is expected to be much smaller in scale compared to previous interventions, providing only a modest boost to oil demand that may not be enough to counteract other market pressures.
Secondly, while OPEC+ is curbing oil output, non-OPEC producers like the U.S., Canada, Brazil, Norway, and Guyana continue to maintain steady production levels. This could result in a slight surplus of light sweet crude and a minor deficit of heavy sour crude by the year's end. If OPEC's discipline falters, the market could see further downward pressure on prices.
Thirdly, the increase in U.S. crude production has also reduced the country’s reliance on imported oil, altering the geopolitical risk premium in the market. Unlike previous years, current geopolitical tensions, including those in the Middle East, have not significantly impacted oil and gas infrastructure, leading to only modest price increases in response to these events.
Fourthly, discounted oil from sanctions-hit Iran and Russia is being readily absorbed by major consumers like India and China. Even small discounts can fulfill substantial demand at lower prices in the physical market, further capping price increases.
Lastly, the outlook for global oil demand remains uncertain. While OPEC and the International Energy Agency (IEA) have divergent forecasts—OPEC is optimistic about growth exceeding 2 million barrels per day, while the IEA estimates it to be less than 1 million barrels per day—the current supply growth outside OPEC might be sufficient to meet demand even if it falls somewhere in between these predictions. Given these factors, unless there is a significant macroeconomic shift or a major conflict that directly impacts energy infrastructure, Brent crude prices are likely to remain within the $75 to $85 range for the foreseeable future.
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