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ANZ Bank said in a note on Friday that falling inventories and an uncertain economic backdrop led to higher crude prices. Earlier on Friday, Brent crude rose 0.3% to $83.55 a barrel and West Texas Intermediate crude rose 0.2% to $79.38 a barrel.
The bank noted that a second straight weekly drop in U.S. crude inventories and signs of slowing inflation remained supportive of sentiment. The oil market was largely range-bound as markets contemplated OPEC’s next move.
ANZ said possibilities included extending, cancelling or completely scrapping the voluntary production cut of 2.2 million barrels per day.
The bank’s current model is based on a gradual removal of the production cuts in the second half of 2024. However, even if the cuts are removed, the market is expected to remain in deficit, with future demand for OPEC output set to be much higher than current production.
As a result, ANZ predicts that crude oil prices will reach $90 per barrel in the second half of the year. If OPEC chooses to cancel production cuts, the bank’s fair value model shows that oil prices could fall to $75 per barrel. At the same time, extending the production cuts could lead to severe shortages and push oil prices to $100 per barrel.
ANZ Bank pointed out that fundamentals suggest that the market may be under pressure from OPEC and its allies to increase production in the second half of the year, but the prospect of ending production cuts could lead to a sharp sell-off in the futures market. Therefore, the most likely outcome is an extension of the production cuts.
Commerzbank said in a report that the oil market is currently trending slightly downward, but prices are expected to recover in the coming months, casting a shadow over the June meeting of the Organization of the Petroleum Exporting Countries.
The International Energy Agency’s downward revision of its global oil demand forecast for 2024 had a negative impact on oil prices, but the agency said the oil market was already undersupplied starting this quarter. The U.S. Energy Information Administration also reported a sharp weekly drop in U.S. crude oil inventories.
Commerzbank believes that OPEC and its allies may find it difficult to reverse their voluntary production cuts, as these were originally intended to last only until the first half of this year, otherwise oil prices will face the risk of falling.
However, Commerzbank noted that maintaining the cuts would also mean a wider supply gap in the second half of the year as demand is expected to rise, underpinning its forecast for higher oil prices in the coming months.
Falling U.S. equities and growing expectations that the Federal Reserve may soon start cutting interest rates continue to support the oil market. However, while the macro picture is critical to near-term price direction and market sentiment, OPEC+ output policy will become increasingly important ahead of a meeting of the oil group’s members early next month.
ING commodity strategists argued in a report that only a partial rollover would be needed to ensure the market remains balanced in the second half of 2024.
However, the report noted that OPEC+ also needs to manage market expectations in some way. “If the consensus begins to shift towards a full extension of the production cuts, it will be difficult for OPEC+ to do anything other than a full extension.”
China’s latest industrial output data showed a drop in refinery activity in April. Crude processing fell nearly 3.5% year-on-year to nearly 14.4 million bpd that month.
Apparent domestic demand also weakened, falling nearly 3% annually to just over 14.6 million barrels per day, according to analyst reports.
In addition, ABN AMRO said that year-on-year increases in crude oil imports, coupled with reduced refining activity, led to a growth in crude oil inventories of just over 800,000 barrels per day in April.
U.S. natural gas prices continued to recover, with front-month Henry Hub futures breaking through $2.50/MMBtu, trading at the highest level since January.
Yesterday’s EIA storage data showed that natural gas inventories increased by 70 billion cubic feet per day in the past week, lower than the expected 77 billion cubic feet per day and lower than the 5-year average of 90 billion cubic feet per day.
Analysts reported that while total U.S. crude oil inventories remain nearly 31% above the five-year average, the gap is narrowing, down from just over 33% last week.
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