When OPEC announced that it would cut oil production in half in early April this year, this news was mostly welcomed by oil producers. Oil stockholders saw their shares skyrocketing to the roof. However, the recent increase in interest rates has massively impacted oil prices across the world as oil demand shrunk considerably. Indeed, oil prices have been on a losing streak for four consecutive weeks now, erasing all the gains they booked after OPEC’s latest supply cut announcement as economic fears take precedence over demand expectations. When the cartel announced the cuts, almost every bank with a commodities department rushed to update their price forecasts, expecting prices to jump even higher than before. Morgan Stanley was a rare exception; it revised its price forecast for oil downwards.
Crude Oil Movement
Source: OPEC
Persisting concerns over “muted industrial activity and higher interest rates…combined have led to recessionary scenarios gaining traction and worries of a downward shift in the oil demand growth,” said the International Energy Agency in its latest monthly Oil Market Report. The agency highlighted that the recent price declines reflect a growing rift between investor sentiment and a tightening supply-demand picture. The agency has then revised its global oil demand forecast by 200,000 barrels per day from its previous projection, to reach 102 million barrels per day in 2023. U.S. and Chinese economic data, fears of more interest rate hikes in the U.S., and fears of a recession, which is already a fact in certain industries, notably freight transport. The world’s largest crude oil importer, China, will account for nearly 60% of global oil demand growth in 2023 and the IEA anticipates after consumption set its all-time record of 16 million barrels per day in March.
Of course, all these are only projections based on historical data and common sense. The thing about markets, however, is that they do not always obey common sense but tend to get swayed on a dime. The past four weeks are evidence of that, with oil traders largely ignoring any fundamentals to focus on what banks call the macro picture. They have ignored data about Chinese refinery throughputs and oil imports to focus on the latest PMU, which has shown a contraction in the country’s growth pace. They have ignored data about U.S. production trends to focus on the April CPI reading, which showed inflation remains a substantial conundrum. The so-called macro picture has a huge bearing on oil demand, which tends to decline in times of high inflation and raising interest rates.