Delayed Demand Rebound Poses Risk to Oil

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Much is riding on a second-half demand boom to rally oil prices, but early signs indicate it's off to a slow start. Brent is now trading August barrels, and despite a widely expected supply deficit and a third round of producer supply cuts, prices remain below $80 per barrel, the level recent Opec-plus actions appear to be trying to uphold. There is an odd chance that demand growth in 2023 might be less than stellar after all. But no forecaster wants to make that call — at least not yet. The market is unnerved by Opec-plus’ decision to roll output curbs until the end of 2024 and Saudi Arabia’s additional, voluntary cut of 1 million barrels per day, as they both implicitly try to fix looser balances. After the 1.16 million b/d supply curtailment announced in April — excluding the formalization of Russia's 500,000 b/d reduction — oil prices initially rallied by $5/bbl and peaked at $87.33/bbl. But they did not stay above $80/bbl more than 16 days. After this week's action, they did not even reach that level. Future prices do not seem to reflect any looming supply tightness. On the contrary, after three successive cuts since October, the forward curve has flattened and drifted lower, with a prompt price now hovering around $77/bbl, versus about $65/bbl for the back-end, five-year forward price. The price structure is thus slightly backwardated, pointing to a roughly balanced market. If anything, Opec-plus seems more successful at rebalancing the market than at stabilizing prices — even if, failing the Saudi backstop, prices likely would have slid lower. But Opec-plus may also be foaming the runway for demand problems ahead. Asia’s demand rebound could be weaker and later than expected — and is highly dependent on export demand from the rest of the world.

Oil Demand, Macroeconomics , Oil Forecasts
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