The price of Brent crude ended the week at $87.39 after closing the previous week at $90.15. The price of WTI ended the week at $83.24 after closing the previous week at $85.45. The price of DME Oman crude ended the week at $88.02 after closing the previous week at $90.32.

WAOP 4-22-24
(Source: Stratas Advisors)

The geopolitical situation in the Middle East appears to have been tempered, at least for now, with Israel launching a limited attack on Iran in response to Iran’s attack on Israeli military assets that consisted of hundreds of drones and missiles. The situation, however, remains volatile. It is still possible that Israel may feel compelled to attack Iran in response to future attacks, including attacks from Hezbollah that have been occurring along the Lebanon border. Additionally, Netanyahu is signaling that Israel is still planning to invade Rafah – despite the warning from the Biden Administration not to do so – which could trigger such attacks from Hezbollah. In the last weeks, Hezbollah launched rockets into northern Israel and the Golan Heights, which is viewed as an escalation by Hezbollah. We think it is less likely that Iran will launch another direct attack on Israel.

We have previously put forth the view that, despite the geopolitical tensions, the oil supply will not be disrupted. We are still holding to the view, even with the U.S. House of Representatives inserting sanctions on Iran’s oil exports as part of the foreign aid package for Ukraine, Israel and Taiwan that was passed over the weekend. We think the Biden Administration is too concerned about high oil prices (and gasoline prices) to enforce sanctions aggressively. This concern has recently been highlighted by a senior advisor to President Biden stating that the Biden Administration will do what it can to keep gasoline prices affordable, including releasing more oil from the Strategic Petroleum Reserve (SPR). We also think it is unlikely that Iran will attempt to block oil ships through the Strait of Hormuz, in part because such action would affect the supply of oil to China, which is a country with which Iran wants to maintain a favorable relationship.

With respect to oil supply/demand fundamentals, the recent economic news pertaining to China provides some hope that China’s economy (and oil demand) will strengthen more than expected this year. Last week, China reported that its economy grew at 5.3% on an annual basis during Q1 and 1.6% in comparison to Q4 of 2023. A significant part of the growth, however, stems from investment in infrastructure, which increased by 6.5% on an annual basis and by 6% in comparison to Q4 of 2023. Additionally, industrial output increased by 6.1%. In contrast, retail sales increased by only 4.7% from the previous year and in March by only 3.1%.

With respect to supply, we are expecting that OPEC+ will maintain its production cuts through the rest of the year for several reasons. First, the breakeven fiscal oil price for Saudi Arabia, as calculated by the IMF has increased to more than $96 in 2024, which is an increase of nearly $20 above the breakeven fiscal oil price for 2020. Secondly, oil demand growth continues to be moderate so far this year. Thirdly, production from Iran, Venezuela and Libya are exempt from OPEC+ quotas, and each of these producers is experiencing increasing supplies. Lastly, it is imperative that OPEC+ maintains discipline and projects the willingness to manage supply proactively to boost the sentiment of the oil market.

Therefore, the extent of the growth of non-OPEC supply will be critical to the overall supply/demand dynamics and upper range of oil prices. So far this year, the increase in non-OPEC supply has been more muted this year – including supply from the U.S. The latest EIA report indicated that U.S. oil production was 13.1 MMbbl/d, which is unchanged from the previous five weeks. Last week, the number of operating oil rigs in the U.S. increased by five and now stands at 511, which compares to the pre-COVID level of 683 that occurred during the week of March 13, 2020. To increase production, U.S. producers will need to increase capital expenditures. Based on our analysis of a set of top producers, planned capital expenditures for 2024 are about 11% below that of 2023.

With respect to the upcoming week, we are expecting that the price of Brent crude will test $85 and could fall to $83, given that the price of Brent crude has fallen below the upward channel that has been in place since January.

For a complete forecast of refined products and prices, please refer to our Short-term Outlook.

About the Author: John E. Paisie, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.