Oil Price Forecast: Supply Cuts and Demand Optimism Drive Crude Higher

Highlights

• Oil prices rise on supply cuts and optimistic demand expectations.
• U.S. EIA and IEA project a demand-supply gap in the coming years.
• Short-term crude oil demand outlook remains positive despite economic concerns.

Overview

WTI Crude Oil prices continued to rise for a second consecutive session on Wednesday, fueled by planned supply cuts from major oil producers and optimistic expectations of higher demand in the developing world. Despite prevailing global economic concerns, the oil market seems poised to remain tight.

Supply Cuts Drive Bullish Oil Market

Last week, Saudi Arabia, the leading oil producer, committed to extending its production cut of 1 million barrels per day (bpd) into August. Additionally, Russia announced a reduction in exports by 500,000 bpd. These supply cuts, coupled with projections from the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA), indicate that demand will surpass supply in the coming years.

Strong Demand, Supply Cuts Tighten Oil Market

The U.S. EIA forecasts a demand-supply gap of 100,000 bpd in 2023 and 200,000 bpd in 2024. The IEA supports this outlook, stating that the oil market will remain tight in the latter half of 2023 due to robust demand from China and developing nations, combined with the supply cuts initiated by Saudi Arabia and Russia.

Positive Crude Oil Demand Despite Inventory Increase

While concerns about economic growth persist, the short-term demand outlook for crude oil remains positive, as many individuals embark on summer vacations involving travel.

However, market sources reported an increase of approximately 3 million barrels in U.S. crude inventories for the week ending July 7, according to the American Petroleum Institute (API). Reuters analysts anticipated a 500,000-barrel rise in crude stocks. If confirmed by the Energy Information Administration’s (EIA) upcoming data release, this would mark the first increase in crude stocks in four weeks. It is worth noting that the figure stands in contrast to the 3.3 million barrel increase in the same week last year and a five-year average decline of 6.9 million barrels.

EIA Lowers 2023 US Crude Production Forecast

The EIA has revised its forecast for 2023 U.S. crude oil production. It lowered it by 50,000 bpd following OPEC’s and its allies’ decision to extend output cuts through 2024. The current projection indicates a rise of 670,000 bpd to reach 12.56 million bpd this year. This is slightly lower than the previous estimate of a 720,000 bpd increase.

Market Awaits Inflation Data Impact

Investors eagerly await U.S. inflation data, released on Wednesday, as it will provide insights into the future of interest rates. Market expectations indicate a 92% chance of a 25-basis-point hike later this month, as per the CME FedWatch tool. It is essential to monitor interest rate developments, as higher rates can potentially slow economic growth and subsequently impact oil demand.

Technical Analysis

WTI Crude Oil prices experienced a slight decline in the market, with the current 4-hour price at 74.76, just below the previous 4-hour close of 75.08. However, the market sentiment remains bullish, supported by the significant margin between the current price and both the 200-4H and 50-4H moving averages. The 14-4H RSI stands at 68.09, indicating a moderately overbought condition.

While the market is currently inside the main resistance area, caution is advised. Traders should closely monitor further price action and potential catalysts to assess the sustainability of the bullish sentiment. There is the potential for a breakout into $76.92 to $77.99, or a pullback into $74.15.