By Nicholas Earl
Oil prices will be supported by the combination of strong demand this year and flagging OPEC production levels, even if this is not currently being reflect in spot prices, argued a leading energy analyst.
Callum Macpherson, head of commodities strategy at Investec, told City A.M. that he did not expect the upcoming monthly forecasts from OPEC and the International Energy Agency to have much effect on markets.
However, he expected them to reflect the central dilemma within oil markets, which is that oil production is unlikely to meet consumption needs later into the year – increasing market tightness.
He said: “I think the reports have been saying essentially the same thing for quite some time, and that is that demand is going to be strong, particularly the second half of this year. That puts a big onus on OPEC to increase output to cover that shortfall. OPEC doesn’t really have the capacity to do that. Or at least not without Saudi Arabia and the UAE going it alone and plugging the gap.”
This contrasts with the signals being provided in spot markets, with oil prices weighed down by conservative economic estimates from China, a hawkish Federal Reserve ratcheting up interest rates, and more recently – concerns over the collapse of Silicon Valley and its wider implications for the economy.
However, Macpherson was expecting these macro-factors to be overruled over time by the fundamental issues between demand and supply.
He argued spot prices were not “necessarily a rational assessment of where the market thinks that the right price ought to be in the future. “
“The spot market tends to be dominated by what is happening now in the physical market, and what is going on in other markets – the sentiments. At the moment, the market is fairly well supplied, but the forward outlook is that the market is going to tighten,” he explained.
Oil demand set to spike in second half of 2023
Last month, the IEA predicted China will drive oil consumption to record levels this year – over 100m barrels per day, as the world’s second largest economy reopens following sustained lockdowns.
It also warned that restrained OPEC+ production – the extended alliance which includes Russia – could mean a supply deficit in the second half of the year.
OPEC has also hiked its forecast for global oil demand last month, its first upward revision since mid 2022.
In its February report, the cartel predicted oil demand will rise this year by 2.32m barrels per day, or 2.3 per cent, following China’s relaxation of zero-covid restrictions.
Oil prices are currently down on both major benchmarks, with Brent Crude sliding 0.94 per cent in this morning trading at $82 per barrel while WTI Crude fell 1.08 per cent to $75.85 per barrel.
Last year prices rallied to a 14-year high of $139 per barrel in March following Russia’s invasion of Ukraine and remained above the $100 milestone into the summer before dropping off amid economic headwinds later in the year.
It recently suffered its biggest drop in months after the Federal Reserve ratcheted up interest rates again.
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