Oil prices flat as tight markets compete with dropping demand ahead of IEA report
Oil prices have flatlined, with major benchmarks being pulled from both directions by competing geopolitical factors in an increasingly volatile market.
Brent Crude was down 0.83 per cent, trading at $121.00 per barrel while WTI Crude slipped 0.78 per cent to $119.70 per barrel in the early afternoon.
Supply tightness has kept prices elevated near the $120 milestone, with the International Energy Agency (IEA) set to release its monthly oil outlook later this week.
So far this year, producers have been unable to match raised production quotas, while Russia’s invasion with Ukraine and subsequent Western sanctions has raised fears of shortages.
Major oil cartel OPEC and its allies (OPEC+) have been unable to deliver pledged output increases, due to multiple factors such as a lack of capacity,, sanctions on Russia, and output in Libya being roughly halved by unrest.
There are also concerns of a supply glut if supplies are over-produced, alongside worries over provoking OPEC+ member Russia – with the organisation remaining neutral on the conflict in Ukraine.
The European Union (EU) has also finalised an oil ban on seaborne supplies, which could also take millions of barrels per day out of the market, even if Russia finds alternative buyers for some of the supplies.
However, a future rally is also unlikely as rebounding demand is being challenged again – with a flare-up in COVID-19 cases in China’s capital Beijing initiating further lockdown measures, while and worries about US interest rate hikes raised concern about pricing.
Beijing’s most populous district Chaoyang has announced three rounds of mass testing to repel an outbreak of cases, following weeks of oppressive measures across both its capital and Shanghai last month to try and contain the virus.
Meanwhile, investors are concerned about interest hikes from a hawkish Federal Reserve, after US inflation data revealed the consumer price index rose 8.6 per cent last month.
A decision is expected on Wednesday, which could see a 75 basis point rise in interest rates, which are currently between 0.25-075 per cent.
Experts: IEA report unlikely to rock markets
Morning Wire approached several oil analysts concerning the upcoming IEA oil market report, which is also due on Wednesday alongside an update on US crude oil inventories.
Ole Hansen, head of commodity strategy at Saxo Bank, argued that monthly oil market reports “do not tend to be market moving events” but that the latest update will be keenly observed by investors due to the “extreme difficulty in gauging the current supply and demand outlook.”
He said: “With the market overall maintaining a bullish view on oil with supply being challenged and given the need for higher prices to curb demand, the report will also be watched closely for any signs of emerging demand destruction, both from higher prices and surging inflation which is threatening global growth.”
Craig Erlam, senior market analyst at OANDA, argued the fundamental driver of oil prices – tight supplies – was here to stay and that the latest report was unlikely to “contain anything upbeat as far as the balance in the market is concerned.”
He said: “We’re effectively relying on severe economic slowdowns and Chinese lockdowns to address the enormous tightness in the market as producers simply aren’t keeping up. I expect that will once again be the takeaway from the IEA report this week, regardless of the slight increase announced by OPEC+ for the summer.”
Oil prices have surged in this year, powered by Russia’s invasion of Ukraine which has compounded supply concerns as lockdown conditions have been scrapped across developed economies.
Both major benchmarks climbed above the $100 milestone in February for the first time in eight years, with Brent Crude prices hitting a 14-year high of $139 prices in March following the US and UK announcements of an oil ban.