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Commodities

Oil at $116 per barrel: forecast and cause of rising oil prices

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how does rising oil prices affect inflation

The price of oil may rise to $115-116 per barrel. The ambitious plans of G7 may be broken because of the difference of interests. The day before, oil prices grew amid moderately harsh rhetoric from the U.S. Federal Reserve and bullish statistics from the country’s Energy Department. According to London’s ICE, Brent crude was at $107.8 at the time of writing. Who benefits from rising oil prices?

Cause of rising oil prices

Commercial oil inventories in the US fell by 4.5 mln barrels, while stocks in Strategic Petroleum Reserve (SPR) decreased by 5.6 mln barrels. This happened despite an increase in production by 200,000 bpd to 12.1 mln bpd. The reason was a surge in exports: black gold shipments to foreign markets increased by 1.5 million bpd, of which a little more than half were crude oil.

There was a trend last week which indicated weak gasoline demand, but it was not confirmed in the latest data. Gasoline inventories fell by 3.3 million barrels. Consumption of the resource jumped 0.7 million bpd to 9.2 million bpd, and RBOB futures have added 6% since the beginning of the week.

Total petroleum product shipments fell 1 million bpd, to 20 million bpd, due to declines in the propane/propylene categories (a seasonal factor) and other (regression to the average after the spike). Overall, demand remains strong, which is helping oil prices.

Also, the day before, the U.S. Federal Reserve raised the benchmark rate by 0.75 p.p., to 2.5%, which was expected. The regulator expects the rate to be at the level of 3-3.5% by the end of the year. Markets were expecting more hikes, so equities and commodities traded positive after the meeting. The lower the interest rates, the lower the risks of recession and oil demand destruction.

The next meeting of the U.S. regulator will be held on September 20-21. Until then, the market will be keeping an eye on inflation, employment, and business activity indicators. How do rising oil prices affect inflation? It is speeding it up considerably. 

The Fed’s decision was received positively, as there were some fears of a 100 bps rate hike, as the Head of The Regulator, Jerome Powell, said at a press conference that if necessary, the Fed would not hesitate to raise the rate even higher. but given the current data, it was considered advisable to raise it a little less.

The Fed’s rate is now at a long-term neutral level that neither accelerates nor slows economic growth. However, U.S. inflation remains at record levels since the 1980s – the June CPI reached 9.1% and the regulator intends to bring it down to 2%. Therefore, the Fed will continue to raise rates and reduce the balance sheet – since September, the volume of QT on the plan to double and reach $95 billion per month.

The market was positive about the absence of a 100bp rate hike, the Fed’s admission that the U.S. economy is slowing, and Powell’s statement that the scope of the next rate hikes could be reduced if inflation slows. 

The regulator will have to continue to go further into territory where interest rates and financial conditions are leading to a slowdown in economic growth. After all, the rising oil prices effect on the economy is hard to overstate. 

Commodities

Crude oil edges higher on supply concerns; API stocks rise

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Investing.com — Oil prices edged higher Wednesday, with elevated tensions in the Middle East providing support after U.S. inventories rose more than expected. 

By 08:45 ET (12.45 GMT), the futures traded 0.2% higher at $80.90 a barrel and the contract climbed 0.3% to $85.55 a barrel. 

Middle East tensions on the rise

Both crude contracts gained around 1% on Tuesday, after Israeli Foreign Minister Israel Katz warned of a possible “all out war” with Lebanon’s Hezbollah, just as the country’s conflict with Hamas in Gaza appeared to be settling down.

The U.S., Israel’s main backer, is attempting to avoid a broader conflict between Israel and the Iran-backed group, as an escalating war risks supply disruption in this key oil-producing region.

Additionally, reports suggested a Ukrainian drone strike led to an oil terminal fire at a major Russian port, potentially impacting the supply of crude from this major supplier.

US crude inventories rise

This enhanced tension has overshadowed data showing an increase in domestic crude stocks just as many were expecting a pick up in demand in the summer driving season to result in falling inventories.

U.S. fell by around 2.3 million barrels for the week ended June 14, according to data from the American Petroleum Institute, compared with a draw of 2.4 million barrels the previous week. 

“The surprise crude build means the report was moderately bearish,” said analysts at ING, in a note.

UBS looks for crude rebound

UBS expects Brent to rebound to the mid to high-$80s, supported by the OPEC+ cuts extension and the seasonal rebound in demand. 

The Organization of Petroleum Exporting Countries and allies, a group known as OPEC+, announced plans earlier this month to gradually phase out its voluntary cuts potentially as early as October 2024.

Brent is then set to move to $80/bbl next year, UBS added, as OPEC+ starts to bring back production gradually from the second quarter. 

“We do expect a negative impact on oil demand from slower GDP growth and higher prices but continue to expect demand to grow until the late 2020s,” UBS said.

 

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Commodities

Gold slips lower; central bank buying set to boost demand

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Investing.com– Gold prices drifted lower Wednesday in tight trading ranges, with the Juneteenth holiday in the U.S. limiting activity. 

At 07:30 ET (11:30 GMT), dropped 0.1% to $2,328.84 an ounce, while fell 0.2% to $2,343.20 an ounce. 

Gold set for central bank boost 

Gold and broader metal prices have retreated in recent sessions after the Federal Reserve said it expected to cut interest rates only once in 2024, compared to earlier forecasts for three cuts.

This has boosted the dollar, which makes gold, and other commodities denominated in the greenback, more expensive for foreign buyers, as well as increasing the opportunity cost of investing in non-yielding assets.

Gold hit a high of almost $2,450 in May an ounce, helped by strong demand from central banks, due to concerns about geopolitical instability and persistent inflation.

Last year, central banks added the second-highest amount of gold ever at 1,037 tons. In 2022, a record 1,082 tons of gold was purchased by central banks.

More buying is likely in the near future, as the World Gold Council’s annual survey, which polled 70 central bankers, found 29% of them plan to raise their gold reserves over the next 12 months.

That’s the highest level since the annual survey began in 2018.

The other precious metals have also traded in a tight range Wednesday. rose 0.8% to $984.75 an ounce, while rose 0.1% to $29.598 an ounce. 

Copper bounce after recent selloff 

Among industrial metals, copper prices rose Wednesday, rebounding slightly after having fallen to its lowest level in two months earlier this week.

Benchmark on the London Metal Exchange rose 1.3% to $9,800.30 a tonne, while one-month copper futures rose 1.4% to $4.5550 a pound.

The slump in copper’s price following disappointing industrial output data from China, the metal’s biggest market, as the housing and construction slump in the second largest economy in the world worsens.

Copper’s price had reached a record high above $11,000 a tonne in May of this year but has rapidly cooled due to worries about rising global inventory levels and weakness in China.

 

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Commodities

Oil market still set to tighten in second half of 2024 – UBS

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Investing.com – The major energy agencies have all recently made revisions to the likely oil balances this year and next, but they still point to the crude market tightening in the second half of 2024, according to UBS.

These revisions included a bearish update from the International Energy Agency, seeing lower demand growth, a bullish update from the Energy Information Administration, with higher demand, and a neutral one from the Organization of Petroleum Exporting Countries.

“With the extension of the OPEC+ voluntary cuts, the IEA and EIA see market tightness persisting for the rest of the year assuming that OPEC+ production will increase only marginally,” analysts at UBS said, in a note dated June 18.

The agencies made mixed revisions to demand growth forecasts this month: the IEA cut forecasts, the EIA raised and OPEC left them unchanged again.

The IEA’s downward revision was driven by weaker OECD and base effects, while the EIA also noted lackluster OECD demand, but raised forecasts on increased bunker fuel demand caused by Red Sea disruptions. 

With this in mind, “we marginally cut demand growth estimates to 1.1Mb/d in 2024 and 1.0Mb/d in 2025,” UBS said.

Turning to supply, the agencies kept their non-OPEC+ supply forecasts broadly unchanged, except for the EIA’s 2024 growth estimates, up 0.1 million barrels a day (b/d) on better-than-expected U.S. supply in 1H24.

Additionally, despite OPEC+’s announced plan to gradually phase out its voluntary cuts potentially as early as October 2024, we continue to model the first return of OPEC+ barrels in the second quarter of 2025 when market balances should allow for a gradual ramp-up.

In the very near term, UBS expects to rebound to the mid to high-$80s, supported by the OPEC+ cuts extension and the seasonal rebound in demand. 

Brent is then set to move to $80/bbl next year as OPEC+ starts to bring back production gradually from the second quarter. 

“We do expect a negative impact on oil demand from slower GDP growth and higher prices but continue to expect demand to grow until the late 2020s,” UBS said.

Rising efficiency and EVs’ increasing impact should see demand growth slow down sharply though, to around 0.5Mb/d within 3-4 years and peak oil by 2029. Despite this demand slowdown, we expect global spare capacity to remain stable at an average level by historical standards as supply growth slows down too. 

In the near term, we see the main upside risks coming from more restricted supply. 

“Extended OPEC+ cuts and potentially a larger drop in Russian production, combined with robust demand could lift Brent above $90/bbl in the near-term in our view. Further escalation in the Middle East and disruption to supply could send it closer to $100/bbl,” UBS added.

The bank’s downside scenario assumes a greater negative impact on oil demand from a global economic slowdown to the tune of around 1.0Mb/d versus its forecasts. 

“Combined with a reduced geopolitical risk premium, this could see Brent prices drop below our long-term oil price of $75/bbl.”

 

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