Where are oil prices heading?

[Dr.Masih Rezvani + 27]

 

Saudi Arabia's recent move to start selling shares of Saudi Aramco suggests uncertain market prospects.

Last weekend, on June 2, the OPEC+ oil cartel agreed to extend oil production cuts until 2025. Previously, the agreement had been set until the end of 2024.

Although this news may seem optimistic, prices are still falling. Why?

These are cuts on paper, as the countries' overall quota was increased by 300,000 barrels per day (bpd), from 39.425 million bpd to 39.725 million bpd by 2025.

Another factor weighing on oil prices is that Chinese manufacturing activity unexpectedly contracted, with the official Purchasing Managers' Index (PMI) falling to 49.5.

This has raised doubts about the country's ability to reach its 5% growth target this year. Trade wars between China, the US, and Europe are also adding fuel to the fire.

If China fails to get back on track and accelerate economic recovery, the market could lose a major oil consumer. In a worst-case scenario, Beijing is expected to intervene by injecting the necessary funds into the financial system to sustain economic growth.

What about geopolitical pressures around the world?
Indeed, tensions continue unabated. In the Middle East, Israel continues its operations against Hamas, while Hezbollah responds by firing rockets at the Golan Heights. In fact, geopolitics is in chaos, not only in the Middle East but also in Latin America, with gold spot prices reaching new highs while oil prices fall further.

Sanctions against Russia also remain tough. In addition, Western countries are looking for ways to tighten these sanctions and cut the flow of Russian oil to the market, although so far, they have had limited success.

Nevertheless, analysts have lowered their oil price forecasts for 2024 for the first time since February, reflecting reduced supply risks and a broadly balanced market.

According to a survey, the average price of Brent crude oil in 2024 is expected to be $84.01 per barrel, and that of US crude oil $79.56 per barrel, below the April forecast.

On the demand side, analysts forecast growth of between 920,000 and 1.8 million bpd, with an average estimate of 1.35 million bpd, lower than the April forecast of 1.37 million bpd.

What to expect now?

If oil demand grows this year by the 2.2 million bpd expected by OPEC and another 1.8 million bpd next year, the cartel's actions from last Sunday will pay off.

However, if demand disappoints again, prices might drop further. The takeaway is clear: monitor the macroeconomic indicators of key economies.

Additionally, Saudi Arabia's recent move to start selling shares of Saudi Aramco suggests uncertain market prospects.

Lastly, oil priced at $80 per barrel is already too low for a balanced budget; Saudi Arabia needs prices in the $100-110 range. This means the country will do everything possible to steer prices in the right direction.