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Optimism in global oil market: Surge in demand and tight supply predicted for second half of 2024


oil price analysis, forex trading

The significant surge in oil prices, now surpassing $90 a barrel, has instilled a renewed sense of optimism among the world's most prominent commodity traders about the oil market's strength in the latter half of the year. This positive sentiment was prominently displayed at an important industry conference in Lausanne, Switzerland. At this event, key figures in the commodities market convened to discuss and forecast the future of oil demand and pricing, reflecting a collective bullish outlook.


Several factors contribute to this optimistic view, chief among them being the supply cuts implemented by OPEC+. These cuts have played a pivotal role in maintaining a balance in global oil inventories, preventing an oversupply that could dampen prices. The impact of these supply adjustments is further augmented by continuously improving assessments of oil demand. Such dynamics have significantly shifted the stance of major trading houses, evidenced by the current trading price of Brent crude, which hovers near a five-month high. This price strength is not solely due to the balanced supply-demand equation but is also influenced by ongoing geopolitical tensions in the Middle East, which add a layer of complexity and risk to the oil market.



One notable perspective comes from Russell Hardy, the CEO of Vitol Group, the world's largest independent oil trader. Hardy predicts a robust growth in oil demand this year, estimating it at 1.9 million barrels per day. This projection exceeds the forecast by the International Energy Agency by over 30%, showcasing a more optimistic view of the market. This expected demand growth is comparable to the surge experienced in 2023, a year marked by a significant rebound in oil consumption as the global economy emerged from the effects of the Covid-19 pandemic.


Other trading giants like Trafigura Group and Gunvor Group echo this sentiment, attributing their optimism to strong global economic growth and supportive recent data, further solidifying the bullish outlook for oil demand as reported by Bloomberg.


The opinion that the global oil market is on the verge of being extremely tight was expressed by Sebastian Barrack, head of commodities at the hedge fund Citadel, during the FT Commodities Global Summit. Barrack’s comments underscore the effectiveness of OPEC's supply management in tightening the oil market. This regained control by OPEC is a key factor behind the current market dynamics, indicating a strategic and successful manipulation of supply to maintain favorable prices and market stability.



Supporting the view of a strong demand for oil, various instances of increased consumption were observed. A notable example is a new mega refinery in China, which received substantial import quotas, indicating a continued uptick in the country's demand for crude oil. China holds the position of the world's largest oil importer, and such movements in its import patterns are significant indicators of global demand trends.


Furthermore, Spain's gasoline sales witnessed a near 9% increase in February, a clear sign of robust demand even in regions like Europe, where the market sentiment has traditionally been more cautious. In addition, the US Energy Information Administration revised its estimate for global oil demand upwards by almost 500,000 barrels a day, further affirming the trend of growing oil consumption.


On the supply side, the market has experienced unexpected disruptions, contributing to the tightening of oil availability. Beyond the well-documented OPEC+ supply curbs, there have been sudden and unforeseen supply constraints. A prime example is Mexico's decision to limit some of its oil exports, a move that has resulted in a scramble among traders to find alternative sources for specific types of crude. This action by Mexico has led to a tighter market for these crudes, underscoring the impact of geopolitical and national policy decisions on the global oil supply.



The market's reaction to Mexico's export restrictions was addressed by Amrita Sen, co-founder and director of research at Energy Aspects, during the conference. Sen described Mexico's decision as an unexpected shock to the market, emphasizing the sensitivity of oil prices to sudden changes in supply dynamics. This situation exemplifies how actions by individual countries, particularly significant oil exporters, can have ripple effects throughout the global oil market, influencing prices and supply-chain strategies.


With the oil market dynamics evolving, the focus is now shifting back to OPEC+. The organization is scheduled to make a crucial decision in June about reintroducing barrels into the market as oil prices continue to climb. Russell Hardy of Vitol believes that a crude price range of $80 to $100 is reasonable and sustainable. However, he warns that if prices exceed $100 a barrel, the market might witness a decrease in demand, commonly referred to as demand destruction. Additionally, such high prices could prompt a supply response from OPEC+, potentially leading to increased oil output to stabilize prices.



The current mood among oil traders across the globe has notably shifted towards a more bullish stance. This is evidenced by the significant trading activity observed recently, especially in call options that yield profits from rising oil prices. This record level of trading activity points to the market's expectation of higher prices. The futures curve, a crucial indicator in the oil market, suggests that the market is currently undersupplied. This under-supply is contributing to the upward pressure on oil prices.


With summer approaching, a seasonal increase in oil demand is anticipated. This expected rise in demand, coupled with the current market trends, leads many traders to predict a further escalation in oil prices in the upcoming months. The anticipation of this demand uptick and its potential impact on prices further fuels the bullish sentiment in the market.



Torbjorn Tornqvist, co-founder and chairman of the commodity trading firm Gunvor Group, highlighted the rapid changes in the oil market. He commended OPEC for its effective management of oil supply, which has kept the market tight but noted the flexibility in their strategy. Tornqvist pointed out that OPEC's control over oil supply includes the ability to release spare capacity into the market as needed, providing a mechanism to counterbalance any undue price escalation or market imbalance.


09.04.2024



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