The seesaw continues in the international oil market, with the situation in the Red Sea finally starting to get the attention it warranted. There is so much happening on both the demand and supply fronts that it is hard to keep track of. The situation in the Middle East is heating up with more players entering the equation and that seems to have brought some risk premium that was previously missing, as mitigating factors were aplenty.
It has not run away, but Brent slowly crossed $80/bbl having earlier shown strong resistance for over a month. Brent is now trading at a three-month high, with the renewed impetus coming from the worsening situation in and around the Red Sea – with a potential to multiply as Iran comes into the fold, with a more realistic chance of being in the firing zone.
That said, the supply disruptions on the ground have not been that significant. The attack on a Russian shipment was a first – and that is where the alarm bells were raised, and risk premiums heightened. The demand front remains strong, whichever way one decides to look at it. There are varying accounts of demand growth projections from the IEA, EIA on the one hand and the likes of Opec on the other.
The demand outlook from OPEC and the International Energy Administration (IEA) previously used to be well-aligned, especially in long term. That has now changed, with frequent divergence of views, and more pronounced since the Opec Plus alliance has doubled down on production cuts, now promised to last the entire 2024.
The IEA foresees subdued global economic growth, whereas Opec sees a 2.6 percent global growth in 2024 to lead to a 2.25 million bpd increase in oil demand. The IEA on the other hand sees oil demand rising by a more modest 1.3 million bpd – more in line with the EIA’s Short-Term Energy Outlook released a few weeks earlier.
Opec’s existing production quota continues till March 2024 – and Brazil’s induction into the alliance has extended more strength to Opec Plus. While Brazil is not expected to be part of the production cuts anytime soon – it will definitely have a big say in the overall global market management, given its status as the region’s largest oil producer. Interesting times are ahead for the oil market, with stockpiles, China recovery and Red Sea the center of attention in the weeks to come.
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