Second quarter crude oil outlook – OPEC production cuts will support prices

Basic outlook for the second quarter of crude oil

Oil prices are likely to continue rising in the second quarter of 2024, but remain subject to the considerable short-term uncertainty that has dogged them since the beginning of the year.

The Organization of the Petroleum Exporting Countries and its allies, the so-called OPEC+ group, agreed to extend production cuts by 2.2 million barrels per day. Of course, Saudi Arabia is an important force for this group. The voluntary 1 million BPD reduction is scheduled to be implemented until the end of June.

These production cuts are probably the main reason why oil prices have risen this year. Maintaining them will provide sufficient fundamental support to the market. But OPEC is no longer the arbiter it once was, and supplies from outside the cartel will inevitably blunt the effects of production cuts within the cartel. In other words, US oil production hit a record in December 2023. At least in the short term, there may be no other option but to decline from there. This outlook may encourage OPEC to stick with production cuts, knowing they will be far more effective.

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The outlook for demand is even more promising.

Oil prices have fallen from their 2022 highs as a combination of the coronavirus pandemic, rising inflation and rising interest rates caused a market with abundant supply to meet uncertain demand.

We can probably expect a better balance this year. Overall oil demand is expected to increase, even if key market players cannot agree on its expected range. OPEC believes production will be 2.25 million BPD this year, while the International Energy Agency predicts a much more subdued 1.1 million BPD. That’s a big difference of opinion.

There are also signs that demand in China is returning to pre-pandemic levels. There is broad central bank consensus that inflation has been loosened in Western industrial economies and interest rates have peaked. Lower interest rates and cheaper credit should also be good news for energy demand.

However, you need to be careful. The conflict between Ukraine and Gaza will continue to impact energy markets through all channels. Russia remains under Western sanctions, and attacks on Ukraine’s energy infrastructure appear to be on the rise. JPMorgan reportedly announced that the attack could take 900,000 BPD of Russian refining capacity offline and add a risk premium of up to $4 per barrel to global markets.

Yemeni rebels continue to attack Western shipping, presumably in support of the Palestinian cause.

Also, the fight against inflation could last longer than markets currently expect, and interest rates could remain high for a long time. The Fed still believes borrowing costs will fall significantly by the end of the year, but it will ultimately be the hard inflation numbers that determine this.

While the fundamental outlook for oil prices may remain somewhat bullish, the path to higher prices is likely to be uneven.

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