Worries over supply disruptions in the Middle East added concerns to the global crude oil market. The growing conflict between Israel and Hamas coupled with Red Sea shipping disruptions due to Yemen’s Houthi attacks, raised tensions of supply bottlenecks.
The Middle East is a critical area for global energy production and transportation, with several major oil-producing countries that combinedly contribute more than 30 percent of global oil production. The recent conflicts have heightened concerns over critical maritime routes, contributing to an increase in global crude prices.
However, the US Fed’s policy moves and the strong US dollar overpowering the strengthening oil prices. There were expectations that the US Fed may cut its rates in the first half of 2024. But the country is still contending with issues arising from heightened inflation opening chances of maintaining elevated interest rates until inflation aligns with the central bank’s desired levels.
Higher rates and a strong US currency can cause oil prices to fall. This is because an increased rate can lead to less demand for oil as activity declines with higher costs, slowing the economy.
The recent International Energy Agency (IEA) report revealed that the global oil demand growth is losing momentum. A sharp decline from China underpinned the global oil demand. As per the agency, the decelerating trend will gather pace in 2024 which could trim world oil demand growth to only half of last year’s solid expansion. The world’s largest crude oil consumers like the United States, Europe, and China are currently grappling with challenges that pose a threat to the demand outlook for oil. Anyhow, the agency predicts China, India, and Brazil are set to account for 78 percent of growth in global oil demand in 2024. On the supply side, the OPEC plus voluntary output cut resulted in a massive decline in global oil supply. Meanwhile, the rising wave of non-OPEC production growth is expected to continue, and hence global supplies are likely to exceed demand this year.
IEA forecasts, global oil supply is set to increase by 1.7 mb/d to a record 103.8 mb/d in 2024, with non-OPEC providing 95% of the incremental barrels. Increased production from the US, Brazil, Guyana, and Canada would be the key contributors to the non-OPEC cartel.
Oil inventory levels showcased a declining trend in the last few months. The US inventories declined to a below-five-year average in December, and it plummeted by about 60 million barrels in January with the on-land inventories falling to their lowest level since 2016.
Looking ahead, prices are anticipated to be shaped by supply-demand dynamics and factors like global economic growth and the escalation of geopolitical tensions. Though the tensions in the Middle East offer a degree of price support, a significant bearish influence is emerging from global economic concerns, especially from the US Fed’s policy decisions and the value of the dollar.
On the price side, NYMEX futures prices continue to trade inside $68-92 a barrel levels initially, and breaking any of the sides would guide fresh direction. In the MCX platform, the short-term outlook remains rangebound with major resistance seen at Rs 6,800 a barrel and support placed at Rs 5,500 a barrel.
(The author is Head of Commodities, Geojit Financial Services)
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