Oil Price Forecast: Demand Concerns Rise as China’s Rate Cut Falls Short

Highlights

• China’s rate cut fails to boost oil markets.
• Weak economic rebound in China raises concerns about oil demand.
• Surging crude exports and supply from Iran and Russia offset OPEC+ cuts.

Overview

Oil prices faced downward pressure on Tuesday as China’s decision to cut benchmark lending rates fell short of expectations, raising concerns about the demand for crude in the world’s largest importer. China reduced its one-year and five-year loan prime rates (LPR) by 10 basis points each, which was less aggressive than anticipated. A Reuters poll had predicted a 15-basis point cut to the 5-year LPR. With the rate cuts widely anticipated, they failed to provide a bullish boost to the oil markets.

Oil Traders Seek Chinese Rebound

To improve their outlook on oil demand, oil traders will likely require evidence of a substantial economic rebound in China. Recent economic data has indicated that the retail and factory sectors in China are struggling to maintain the earlier momentum. This has prompted the Chinese government to discuss measures to stimulate economic growth, while major banks have lowered their 2023 economic growth forecasts for the country, expressing concerns about the weakening post-COVID recovery.

Supply-Side Factors Challenge Oil Market

In addition to the concerns about demand, there are also supply-side factors impacting the oil market. Iran’s crude exports and oil output have reached new highs in 2023, despite U.S. sanctions. Furthermore, Russia is expected to increase seaborne diesel and gasoil exports this month, which offsets the cuts made by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Moscow itself. JPMorgan analysts noted that supply has exceeded expectations from various sources, including the United States, non-OPEC countries, and even within OPEC+ like Nigeria, Iran, and Venezuela.

JPMorgan Lowers Brent Price Forecast

These combined factors have led JPMorgan to revise its Brent price forecast downward. The bank now predicts an average price of $81 a barrel for this year, down from the earlier projection of $90. The analysts also emphasized that even if the OPEC+ production cuts are extended to 2024, they will not be sufficient to bring global supply and demand into balance.

Rate Hike Concerns Affect Oil Demand

As markets eagerly await future rate clues from U.S. Federal Reserve Chair Jerome Powell’s testimony later in the week, concerns about higher inflation have led two policymakers at the European Central Bank to advocate for more rate hikes. Higher interest rates can dampen spending appetite and subsequently impact oil demand.

Short-Term Forecast:  Gains Capped by China Rate Cuts, Supply Concerns

In summary, oil prices experienced a decline as China’s rate cuts fell short of expectations, raising worries about oil demand. To boost market sentiment, oil traders would require tangible signs of economic recovery in China. Additionally, concerns about supply persist, with Iran and Russia increasing their crude exports, counteracting OPEC+ cuts. JPMorgan analysts have revised their price forecast downward, highlighting the ongoing imbalance between global oil supply and demand.

Technical Analysis

The current analysis of the crude oil market reveals a mildly bearish sentiment. The 4-hour price is slightly higher than the previous close, indicating a small upward movement. However, it remains below the 200-4H moving average, suggesting a bearish outlook. The 50-4H moving average shows a more neutral stance, as the current price is above it. The 14-4H RSI indicates a balanced sentiment. Overall, the market appears mildly bearish, but it’s crucial to monitor ongoing developments for accurate assessments.