Oil, A Fiery Tale of Supply and Demand

Last week, the reports released by the three major oil organizations gave investors a better understanding of the short-term crude oil market. After oil prices have been rising for some time, major adjustments are expected this week.

The Dynamics of Demand and Supply

In June 2023, global daily oil demand broke a record at 103 million barrels and is still expected to hit a peak in August.

According to the IEA, demand for crude from the 13 OPEC members averaged 29.8 million barrels per day in the October-December period, much higher than the 27.9 million barrels expected in July.

The OPEC monthly report shows that the growth rate of global crude oil demand in 2023 is expected to remain unchanged at 2.44 million barrels per day.

(Net long positions lifting oil prices, OPEC monthly report)

However, global oil supply fell by 910,000 barrels in July, mainly due to Saudi production cuts. Currently, crude oil inventories in developed countries are about 115 million barrels below the five-year average.

That suggests an increasingly tight market, partly due to falling supply. In 2H2023, the IEA forecasts a reduction in global inventories of about 1.7 million barrels per day, suggesting further tensions in the market could result in a bigger impact to prices.

Production Cuts and Their Impact

One of the standout factors contributing to the evolving oil market landscape is the strategic moves made by key oil-producing nations. Saudi Arabia’s unilateral production cuts and Russia’s reduced exports have jointly pushed the output of OPEC+ members to a nearly two-year low. This concerted effort to manage production has played a pivotal role in shaping the current scenario.

Unbalance between supply and demand leading price to swing

Oil prices maintained a steady uptrend in July. From an export standpoint, the export price of Russian crude has risen sharply, with an increase of US$ 8.84 per barrel, and the total price reached US$ 64.410.

Still, Russia’s oil revenues are down by more than a fifth from a year earlier, according to the IEA. However, technically speaking, crude prices will face an adjustment in the short run.

(Daily chart of Brent crude, Ultima Markets MT4)

Based on the daily chart shown above, crude price has reached the important resistance area of 87-88 US dollars. The Stochastic Oscillator is also showing divergence as the price keeps trying to move above this resistance zone.

(1- hour chart of Brent crude, Ultima Markets MT4)

In the 1- hour period, the short-term moving average has completely declined, and the medium- and long-term moving average has completely fallen too, and the oil price has also made an effective correction. There is a certain downward pressure on oil prices within the day, and the bottom is looking at the upward trend line.

Overall, oil prices will see some downward pressure in the short run. However, with production cuts and stable demand growth, oil prices still have the momentum to rise this year.

Future Outlook

In conclusion, the oil market is poised to experience short-term downward pressure, influenced by the factors we’ve explored. However, the overarching dynamics, characterized by production cuts and a stable growth in demand, suggest that oil prices still possess the momentum for a potential rise in the year ahead.

It’s important to note that the oil market is susceptible to a multitude of variables and is subject to frequent changes. As an investor or observer, it’s crucial to stay informed about the latest developments and insights to make informed decisions in this ever-evolving market.

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Disclaimer

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