TOCOM Energy

What drives the price of oil starting Monday is this past weekend’s meeting of OPEC+.
A global shortfall in crude oil supply is set to deepen in the third quarter as Saudi Arabia said it will cut its crude output by another 1 million b/d, deepening OPEC+ alliance production cuts to 4.7 million b/d.
The deal also involves a complicated rebalancing of the alliance’s 2024 production baselines from which quotas will be calculated, redistributing allocations in favor of the UAE, with its higher spare capacity. OPEC+ also said in a statement that it will limit combined oil production to 40.463 million bpd over January-December 2024.

Despite the production cuts and demand growth forecasts for this year largely holding up, the May monthly average price for benchmark Middle East Dubai, which is the primary sales-reference price for Middle East oil producers, tumbled over 10% versus April.
Traders had already raised concerns over the sluggish pace of growth in the US and a possible further rate rise, while oil market is weighing Chinese demand, which is the main uncertainty for markets right now.
So it is crucial to take OPEC’s decision in the context of sentiment and market-based positioning, which is extraordinarily fragile and extremely short for now.

The current market is extremely difficult to trade directionally, as oil remains rangebound after it’s 2022 highs of over $100 a barrel. The continuous weakness in the oil price has divided the views of analysts regarding the nature of the latest oil price cycle.

There are short-term oil market data that inform cyclical price changes and longer-term indicators that drive the more structural price, or secular, price level. Any mismatch between supply and demand could cause price swings, after such swings, prices appear to revert to their long-run mean value or long-run marginal cost, which also appear to change over time.
Besides, the structural and the cyclical don’t always align, and this is one of those moments.
What most analyst agree on is that the oil market’s structural outlook is one of tightness, but for the time being it is being offset by cyclical weakness.

On the structural side, some argue that we have entered a world of oil prices being higher for much longer, the reason is that years of underinvestment and steadily rising demand have tipped the market into an undersupply that cannot be fixed quickly or easily.
On the cyclical side, growth cycles in the global economy are incredibly important for commodities markets in general, and oil prices in specific.

While some economists have been projecting a recession just around the corner all year, some argue that the latest downturn is part of a cycle in manufacturing activity and energy prices that has repeated with an average duration of three to four years since the early 1990s. According to the theory, the current slowdown in energy might be a mid-cycle soft patch, and will be followed by a new cyclical rebound although it’s likely to be a below-trend one.

Another thing to note is that global inventories of petroleum and more cyclically sensitive components such as distillates remain below the long-term average. This means that inventories are likely to deplete quickly in the event that the economy gains momentum again leaving little time to rebuild them in the short-term. In the case of low inventory, oil price range may be larger than expected.