Having rallied to $90/bbl and beyond for a brief while, it appears the international oil market seems content for now, as it weighs the upsides and downsides – with no clear winner. The last week has seen Brent oil flirting with the $90/bbl barrier – trying to break free on every occasion, only to be tested sternly and settling at just under. The relative calm as the West would like to call it, in the Middle East, seems to have a role in oil prices searching for impetus.
The fear of escalation arising from the Iran-Israel conflict was always overblown, according to close market observers. The likelihood of the two countries taking the conflict to an actual all-out war was never that high – and it was always going to be a matter of settling the score. The risk premium was never going to last long, as the focus shifted back to the more active war zones in Ukraine and Palestine. The supply disruption risk with a geopolitical angle from an additional source is now perceived as low.
On the demand front, China continues to report strong growth numbers defying all odds despite continued negative press in much of the West. China’s 1Q growth numbers surpassing 5 percent came as a surprise to many, which was significantly above expectations, and came without much of the fiscal stimulus taking shape. With the Chinese government vying to keep the factories running at full throttle offering a record stimulus, and the inflation well under control – expect another quarter and more of China leading the global demand growth. That only means the pressure on oil prices will remain high and so far, Chia’s growth prospects seem to have a considerable weight in the demand equation.
On the other hand, there is ever-increasing anxiety in the market on the US Fed’s monetary policy call. The much-awaited rate cut is taking longer than many had anticipated at the start of the year, as inflation numbers support the continuation of the existing policy stance. And that is now what is holding back the bulls, more than most factors.
Last but not least is the ever-present threat of the Opec Plus group responding with an extension of its existing supply cuts should things turn unfavorable on the demand front. Saudi Arabia, Russia, UAE, and other leading members have repeatedly put on enough of a show for the world to know that keeping oil markets balanced is a goal, for which the cartel is ready to go to any lengths. Voluntary cuts from the leading participants are already in place, and more of that cannot be ruled out. For now, the market seems to be as close to balance as it has been in the recent past.