John Paisie, Stratas Advisors

Oil prices continue to linger around their 200-day moving average and well below the highs seen during September of last year. Oil traders continue to be concerned about resiliency of economic growth and skeptical of OPEC+’s ability to manage supply.

Additionally, while the geopolitical situation has been tenuous, there has been no interruption in the production or flow of oil. Consequently, while oil prices jump on disturbing geopolitical news, oil prices quickly give back the upside as soon as oil traders realize that oil is continuing to flow.  

Looking forward, we think the oil market is getting closer to an inflection point where the focus will be shifting from macro-level factors toward supply/demand fundamentals.

We are expecting the following:  

  • One way or another, we think the fighting will end in Gaza during the next month or so through negotiations, in part, because of internal and external pressures on the Israeli government.
  • Not only will the pressure increase on Israel, pressure is increasing on the Biden administration with calls for a cease-fire coming from several factions that are important sources of support for the Democratic Party, including the progressive members in Congress, political leaders of Democrat-led cities and black pastors. In response, the Biden administration is putting pressure on Israel. In early February, the administration issued a memorandum that requires allies receiving military aid to provide assurances that there are adhering to international law. Israel will have 45 days to respond.
  • Neither the U.S. nor Iran are likely to confront each other directly. Instead, we expect both parties to be measured in their actions. Consequently, we think the risk of disruption to the delivery of oil to the market is limited.

With respect to the global economy we are expecting the following:

  • The U.S. economy will remain relatively strong and will continue to be supported by deficit spending and, to some extent, by the Federal Reserve ending its tightening cycle. It is unlikely, however, that the Federal Reserve will cut rates as fast as some market participants are hoping. While headline inflation has decreased, core inflation (excludes food and energy) has been stuck around 0.3% on a month-to-month basis, which is a level that is nearly twice the target rate of the Federal Reserve. As such, the Federal Reserve will either have to change its view on the acceptable level of inflation or keep interest rates higher for a longer period than currently expected by the market.
  • China’s economy will continue to face challenges. The latest official Purchasing Managers Indexes (PMI) for China indicated that China’s manufacturing sector contracted for the fourth straight month with the reading for January coming in at 49.2. The PMI for the non-manufacturing sector came in at 50.7, which indicates only mild expansion. In contrast to the U.S. equity markets, China’s CSI 300 Index has lost around 40% of its value since the highs of 2021. Also, China is still facing a debt-laden real estate sector, which represents around 25% of China’s GDP.
  • The EU economy, while growing at a much lower rate than the U.S. economy, is poised to be provided with a boost from interest rate cuts that are likely to take place later this year.  

Based on the economic outlook, coupled with the outlook for alternative fuels and EVs, we are expecting oil demand will increase at a moderate pace during the remainder of the year, and despite the struggles of China, Asia-Pacific will represent the bulk of increased demand.

From a supply perspective, we are expecting OPEC+ will attempt to be proactive in managing supply to support oil prices. We also think that OPEC+ still has the ability to influence the oil market, despite the growth in non-OPEC supply. However, to convince oil traders to adopt a more bullish sentiment, OPEC+ will need to adhere closely to its supply targets, and most likely extend its latest round of supply cuts past the end of March.

Given the expectations for macro-level factors, as well as the supply/demand fundamentals, we are forecasting that the price of Brent crude will increase during the second and third quarters of this year and move toward $90/bbl. There are risks associated with this forecast—upside risks and certainly downside risks. It is still possible that the situation in the Middle East will spin out of control and result in oil prices spiking.

Alternatively, oil prices could tumble if growth in oil demand disappoints because of the global economy faltering—and similarly if OPEC+ loses control of the oil supply. These risks, however, represent developments outside of our reference forecast.