What to watch in the oil markets in the second half of the year

A few weeks ago, many energy industry analysts expected global oil prices to rebound in the second half of this year, with Brent crude climbing above $90 a barrel or more, but that changed after the Organization for The Organization of the Petroleum Exporting Countries (OPEC+) announced earlier. the month it would begin lifting current production limits by October — sooner than many anticipated.

The potential for additional supplies to hit the global market sooner than expected sent oil prices lower following the announcement. Even though Brent crude recently climbed back above $85 a barrel, the news changed the global oil market equation for the second half of the year.

“The fact that (the OPEC+ announcement) caught the market by surprise obviously caused a depression in oil prices,” said Mark Luschini, chief investment strategist with Janney Montgomery Scott, “and probably deservedly so.”

For consumers, OPEC+’s decision to lift production limits could keep a lid on gasoline prices. For businesses, the costs of oil-based inputs could also be kept under control, helping to reduce inflationary pressures.

Recalibrating expectations

Count Luschini among the analysts who predicted a rebound in prices in the second half. Brent crude oil prices rose 20% year-to-date through mid-April to $93 a barrel before falling below $80 in late May.

But a stronger-than-expected global economy and the outlook for future price-friendly interest rate cuts by global central banks and the Federal Reserve have led many analysts to view the decline as a near-term problem.

“Global economic activity is percolating at a better pace than previously thought this year,” Luschini said, noting areas of growth outside the U.S. and the stabilization of China’s economy.

However, the Fed may not cut rates as soon as analysts previously anticipated, with most Fed governors now expecting just one rate cut this year, while many analysts had anticipated several cuts entering the year.

Given the shift in expectations about when the Fed might cut rates and the potential increase in production by OPEC+ in the fourth quarter, Luschini tempered his oil price expectations for the second half of the year to $80-85 per barrel.

Oil is about half the price of gasoline in the U.S., with the average price falling 15 cents a gallon in the past month to $3.55 a gallon. Gas prices typically rise as the summer holiday season approaches, but OPEC+’s production announcement may dampen the usual summer surge.

Divergent demand forecasts could also influence prices

Luschini is not alone in rejecting a more optimistic forecast for the second half of oil prices.

The US Energy Information Administration (EIA) earlier this month cut its forecast for the average price of Brent crude this year to $84 from $88 a barrel. A day later, the International Energy Agency (IEA) cut its forecast for global oil demand growth this year by 100,000 barrels per day to 960,000.

Divergent demand forecasts could also serve to keep prices in check as they influence decision making. OPEC, for example, says global demand will rise by 2.2 million barrels per day this year, more than double the IEA estimate. The group’s optimism drove its decision to reduce production limits.

Meanwhile, JP Morgan analysts suggested that a number of OPEC countries have already exceeded their stated production limits and seasonal demand could increase crude demand by 4 million barrels per day by August, reducing current global stocks.

“In principle, summer inventory draws should be enough to push Brent oil back into the high $80-$90 range by September,” the report said.

Jefferies isn’t so sure, based on its recent global energy market report. Its $84 price reflects what it sees as easing geopolitical concerns, falling diesel consumption in Europe and an economic slowdown in the US.

The IEA also estimates that annual global investment in clean energy will be double that in fossil fuels in 2024, further limiting oil’s upside.