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28 July 2023

Oil Market Developments: Interest Rates, Crude Inventories, and OPEC+

Oil prices experienced an upward trajectory on Thursday, with Brent crude surpassing $84 per barrel for the first time since April. This surge was underpinned by supply constraints stemming from OPEC+ production cuts, along with renewed optimism surrounding Chinese demand and global economic expansion.

A streak of four consecutive weeks of gains has characterized the crude oil market, attributed to anticipated supply constriction resulting from output reductions by the Organization of the Petroleum Exporting Countries (OPEC) and its collaborative partners, collectively known as OPEC+. These supply curbs, coupled with certain involuntary disruptions, have contributed to the upward momentum.

Brent crude concluded the session with a gain of $1.32, equivalent to a 1.6% increase, closing at $84.35 per barrel. In parallel, U.S. West Texas Intermediate (WTI) crude registered a rise of $1.31, reflecting a 1.7% climb, settling at $80.09.

UBS analysts asserted a positive perspective on the oil market, noting, "We see the oil market undersupplied. We retain a positive outlook and look for Brent to rise to $85–$90 over the coming months."

However, a slight setback occurred on the preceding day when U.S. crude inventories posted a decline that fell short of expectations. Moreover, the U.S. Federal Reserve executed an interest rate increase of 25 basis points, creating an avenue for potential further adjustments.

The prevailing risk appetite in broader financial markets has received a boost from growing anticipation that central banks like the Federal Reserve are approaching the culmination of their policy tightening endeavors. Such a trend could augment the prospects for both global economic expansion and energy demand.

Recent government data revealed a robust 2.4% growth rate for the U.S. economy in the last quarter. The resilience of the labor market has bolstered consumer spending, while businesses have channeled efforts into equipment investment, potentially mitigating the risk of a recession.

Jim Ritterbusch, President of Ritterbusch and Associates in Galena, Illinois, highlighted the appealing nature of risk assets such as oil in light of interest rate hikes nearing a peak and mounting confidence in avoiding a recession. He remarked, "With interest rate hikes either at or near a peak amidst increasing views that a recession will be avoided, risk assets such as oil have become increasingly appealing."

The European Central Bank continued its pattern of interest rate hikes, marking the ninth consecutive increase.

A commitment announced by China to bolster policy support for its economy has ignited expectations of a resurgence in oil demand from the world's largest importer of crude oil. Phillip Nova analyst Priyanka Sachdeva emphasized this prospect in a note.

Looking forward, attention is directed towards an upcoming meeting on August 4, where OPEC+ ministers will convene to review and assess the state of the market.