On the afternoon of July 17th, the oil market experienced a sudden surge, with both US and Brent crude soaring by over 2% following a report from Reuters stating that "Saudi Arabia's Energy Department will voluntarily extend production cuts until the end of 2024." This news prompted a rise in European energy stocks as well.
However, soon after, another report claimed that Reuters had retracted the article, labeling it old news from June 4th. Consequently, Brent crude and West Texas Intermediate (WTI) erased their gains within twenty-five minutes, dropping approximately $1.5 per barrel. At the time of writing, Brent and WTI were trading at $79.02 and $74.27 per barrel, respectively.
Throughout most of this year, crude oil bulls have suffered significant losses. Analysts say that the oil market has become a battleground between bearish economic worriers and the supply fundamentals, with prices being driven more by speculative investors than by supply-demand dynamics.
With central banks in Europe and the US continuously taking a hawkish stance, many are worried about the economic implications of rising interest rates and are opting to sell oil when the economy appears to be slowing. At one point, the bears were in control, with Brent crude falling below the $70 mark.
However, last week saw a significant rebound in oil prices due to the combination of OPEC's production cuts and a weakening US dollar, pushing Brent crude back to $80 per barrel. A recent report from the National Australia Bank suggested that if OPEC's predictions come to fruition, "oil prices could far exceed $100 per barrel."
Bloomberg analysts suggest that Brent crude returning to $80 per barrel could signal that the market has bottomed out. As supply growth reaches its peak, Saudi Arabia's production cuts and the decline in Russia's oil exports are gradually having their expected effect: tightening the market and pushing up oil prices.
The International Energy Agency (IEA) indicated in its latest report that the oil market supply is expected to tighten in the second half of this year due to robust demand from China and other developing countries, and recent announcements from Saudi Arabia and Russia to reduce supply.
Toril Bosoni, head of the oil market at the IEA, suggested that they expect the market to significantly tighten. With the seasonal increase in demand, prices are likely to continue rising in the third quarter.
Jorge Leon, senior vice president of oil market research at consulting firm Rystad Energy A/S, believes that Brent crude returning to $80 per barrel could serve as a turning point in market expectations, signaling the start of a hot summer for the oil market.
Morgan Stanley's chief commodities strategist Natasha Kaneva released a report suggesting that global crude oil demand will peak only eight years from now. She predicts that by 2030, global oil demand will reach 106.9 million barrels per day, an increase of 7.1 million barrels per day from 2022 levels.
Meanwhile, the supply-demand gap is expected to exceed 4 million barrels per day. To bridge this gap, the incentive price of Brent crude could rise to as much as $100 per barrel.
On July 17, Ed Morse, head of commodity research at Citibank, vocally disagreed with the optimism of oil bulls, stating that a tightening oil market is only an illusion.
Morse argued that it's unrealistic for the oil market to assume that oil demand in all countries is about to rise:
Europe is in recession, and we still don't know if the US will have a hard landing.
Despite efforts from major oil producers led by Saudi Arabia to boost oil prices, Morse stated that US oil production is expected to break records this year. Increased oil production outside of the OPEC+ area is undermining OPEC+'s pricing power.
Output within OPEC+ is also increasing, with production beginning to rebound in Iran, Venezuela, and Nigeria.
At the same time, some oil bears point out that so far this year, the share prices of the four major US onshore drilling companies have fallen by an average of 25%, while the S&P 500 Energy Index has fallen by just 2.75%, and the S&P 500 Index has risen by 18%. Following a recent wave of idle drilling rigs, investors are worried this might signal an economic slowdown leading to decreased oil demand.
Morgan Stanley analyst Natasha Kaneva previously pointed out in a report that they no longer believe OPEC+'s production cuts this year can balance the oil market. Consequently, they have lowered their target price for Brent crude this year from $90 per barrel to $81 per barrel.
