Wall Street has been predicting a big surge in oil this year. But now the prices are lower

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  • Macroeconomic concerns, potential rake hikes and a slower-than-expected recovery in Chinese demand capped oil price gains, analysts said.
  • The price stagnation comes despite several OPEC+ members announcing further voluntary cuts totaling about 1.6 million barrels a day earlier this month.
  • Historically an advocate of containing prices at the pump, the US has repeatedly called on OPEC+ producers to ramp up supplies.

Oil prices were rocked by the collapse of several US and European lenders earlier this spring, which discouraged volatility-averse investors from moving away from historically riskier assets, such as commodities.

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A surprise decision by several OPEC+ producers to voluntarily cut production earlier this month had pushed analysts’ oil price forecasts close to $100 a barrel, but stagnant prices now point to a deepening gap between macroeconomic sentiment and supply and demand fundamentals.

Oil prices once again lulled near the $80 a barrel mark, nearly revisiting territory they traversed in early April, before OPEC+ coalition members announced a unilateral cut totaling $1.6 million barrels per day until the end of the year.

The drop in production prompted some analysts to warn that prices could climb into the triple digits, with Goldman Sachs adjusting its Brent forecast by $5 a barrel to $95 a barrel for December 2023.

Analysts now report that the broader financial turmoil has so far hampered this bullish outlook, as supply and demand factors are offset by recession concerns.

“Oil markets have fully softened the momentum of OPEC+’s surprise cut earlier this month, and we think this primarily reflects deep pessimism about the macro outlook, with little evidence of incremental demand weakness thus far,” they said. Barclays analysts in a note on Wednesday.

“Refinery margins and weaker commodity demand have been in focus recently, but we think markets may be reading too much into the implications of these trends for the demand outlook. We also believe markets may be underestimating the OPEC+ determination to keep the inventory situation under control”.

“People are really betting on China reopening,” Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets, told CNBC’s “Squawk Box” Wednesday.

Beijing, the world’s largest importer of crude oil, held back its purchases last year due to drastic “zero-Covid” restrictions that depressed fuel requirements for transport. China has progressively lifted its pandemic measures since late last year and local demand for crude is returning, but at a more “subdued” pace, Croft noted.

“And the Fed’s problem is real. I think that’s something that a lot of us got wrong in terms of the impact of, you know, rate hikes, recession fears,” he added.

“We have these OPEC cuts in place, we have, you know, again strong demand in India, China is reopening that should be set up for a bull story. People are still optimistic about the second half of the year, but the question is, can you get over the great wall of worry?”

Viktor Katona, chief crude oil analyst at Kpler, told CNBC by email that oil prices suffered from a “constant barrage of gloomy macroeconomic news creating a backdrop of negative sentiment” as well as market distrust in the implementation of OPEC+ production cuts . Market participants often wait for a visible spin-off, such as lower export rates, to account for production cuts, which can create a disconnect when ship cargoes come off inventories.

But Katona predicts price-supporting tightening in physical markets during the summer season:

“We still see July and August as the tightest months of 2023, with demand outstripping supply by about 2 million barrels per day (barrels per day), so the overall direction is still the same,” he said, noting that, globally, consumers will exit their annual refinery maintenance periods that limit their intake within that period.

“The net length of crude oil futures contracts has fully recovered from the banking panic seen in March and the net length of WTI is the highest since November 2022, so the belief that prices need to rise is definitely widely shared by the market.”

But China’s long-awaited reopening may prove to be too little, too late. A trade source who was only able to comment on condition of anonymity due to contractual obligations said the market is waiting for concrete signs of physical inventory drawdowns. Another pointed to generally tight refining margins in Asia and a “weak demand cycle.” Another said that China’s reopening has been fully factored into current prices and that Beijing’s needs are simply being met by Russian oil. Moscow has diverted 20 percent of the oil it has supplied to Europe to other markets such as Asia, Russian Deputy Prime Minister Alexander Novak said Wednesday, in comments reported by Reuters.

Kpler data indicates that China’s imports of Russian crude averaged 1.59 million barrels a day in March, up 68% from the same period in 2022. Croft says Chinese buyers have been “beneficiaries of sanctions policies,” as Moscow’s low prices have also prompted other sanctioned sellers, such as Venezuela and Iran, to discount their crude.

Oil prices were rocked by the collapse of several US and European lenders earlier this spring, which discouraged volatility-averse investors from moving away from historically riskier assets, such as commodities.

OPEC+ sources told CNBC at the time that these sentiment-driven fears were likely to be temporary and sidelined by the reality of supply and demand. The group meets to discuss cabinet-level policy for one of two annual meetings in June, when Croft signals that Gulf producers are likely to set the agenda.

“When you think about Russia, Russia makes involuntary cuts. They basically rebrand the sanctions issue as a production cut. It’s really a question, I think, right now, about Saudi Arabia and the other Gulf producers, what do they want to do. Again, Russia is happy to have anything that raises prices, but it’s not in the driver’s seat.”

OPEC+ Russia co-chairman’s clout within the group was stifled by Western sanctions against his imports of crude oil and petroleum products, in effect since December and February respectively.

As markets stabilize around $80 a barrel, Croft wondered what resources still remain in OPEC+’s arsenal. “The question is right now, do they have more bullets to play, as we go to a meeting in June?”

The latest cuts already indicate a tight supply-demand balance that could hit households, the International Energy Agency warned in its latest monthly oil market report.

“Our oil market balances were already set to contract in the second half of 2023, with the possibility of a substantial supply deficit emerging. The latest cuts risk exacerbating these tensions, pushing up both crude and commodity prices. Consumers currently under siege from inflation will be even more affected by rising prices, especially in emerging and developing economies,” he said.

A historical defender of containing prices at the pump, the United States has repeatedly called on OPEC+ producers to increase supplies, sparking a war of words with the group’s chairman Saudi Arabia when the coalition instead opted for a cut of 2 million barrels per day in October. US shale production itself, “traditionally the most price-responsive source of increased production, is currently limited by supply chain bottlenecks and higher costs,” warns the IEA.

During Biden’s presidency, US energy policy has been defined by a push towards climate awareness. Shortly after taking office, the head of state suspended new oil and natural gas leases on public land and waters and initiated a thorough review of existing permits for fossil fuel development. Biden has openly criticized the oil industry for taking profits at the expense of consumers, in June of last year saying ExxonMobil “made more money than God.”

But shortages of crude oil supplies and soaring gasoline prices have prompted Biden, who announced his re-election campaign on Tuesday, to reconsider his tactics, Croft said.

“You have President Biden coming into office, essentially saying, keep the oil in the ground. And now when he’s faced with higher retail gasoline prices, they’re essentially saying to the oil companies, no, put your money in the ground. We’ve seen a significant shift in oil policy from the Biden administration,” he said Wednesday.

“That said, the solid defense of American oil and gas is usually at the Republican end of the House.”

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