Oil Prices Forecast: Will Demand Surge Continue to Drive Gains?

Oil Market Weekly Recap and Forecast

Oil prices dipped slightly on Friday, reflecting deteriorating U.S. consumer sentiment, yet achieved a notable 4% gain for the week due to strong 2024 demand forecasts. Both Brent and WTI benchmarks posted their highest weekly percentage increases since April.

Last week, Light Crude Oil futures settled at $78.45, up $2.92 or +3.87%.

Key Drivers of the Week

Consumer Sentiment and Economic Indicators

U.S. consumer sentiment hit a seven-month low in June, suggesting skepticism about economic improvements. Despite this, forecasts for robust oil demand in 2024 limited the downside. The U.S. Energy Information Administration (EIA) upgraded its oil demand growth estimate for next year, and OPEC maintained a forecast for 2.2 million barrels per day (bpd) growth. Meanwhile, the International Energy Agency (IEA) was more conservative, cutting its forecast to below 1 million bpd.

Federal Reserve and Interest Rates

The Federal Reserve kept interest rates unchanged, with market participants not expecting cuts until December. This decision reflects ongoing concerns about economic stability and inflation control, which could dampen oil demand by curbing economic growth.

Supply and Inventory Data

Baker Hughes reported a drop in the U.S. active oil rig count, now at its lowest since January 2022, indicating potential future output declines. Contrarily, U.S. crude inventories saw an unexpected rise of 3.7 million barrels, far exceeding the anticipated 1.55 million barrel decrease, raising concerns about excess supply.

Global Supply and OPEC+ Actions

Russia confirmed adherence to its OPEC+ production obligations after exceeding its quota in May. However, the market remains cautious about OPEC+ compliance. Despite pledges to curb output, traders are wary of potential increases in supply, especially with phased-out cuts beginning in October.

Geopolitical Risks

Geopolitical tensions persist, with Gaza ceasefire talks and attacks on shipping routes by Iran-allied Houthi militants highlighting the fragile nature of global oil supply chains. These factors continue to pose risks of supply disruptions, potentially impacting market stability.

Market Sentiment and Positioning

Money managers increased their net long U.S. crude futures and options positions, indicating a bullish sentiment driven by optimistic demand forecasts and easing U.S. labor market pressures. The U.S. Labor Department’s report of a 0.2% drop in the Producer Price Index for May, alongside high initial jobless claims, suggests easing inflation pressures, supporting a positive outlook for oil prices.

EIA and OPEC Forecasts

The EIA’s revised forecasts suggest a mixed picture: while U.S. oil output is expected to grow, projections for 2024 have been slightly lowered. However, global oil demand is anticipated to rise, potentially tightening supply through early next year. OPEC’s forecast remains optimistic, projecting strong demand growth and maintaining current output cuts until September.

Technical Outlook

Bullish Indicators

OPEC’s robust demand forecasts and the Federal Reserve’s cautious approach to rate hikes provide a bullish short-term outlook for oil prices. Managed supply levels, coupled with increasing global demand, are likely to support prices.

Key Technical Levels

Next week’s price direction will hinge on trader reactions to the major retracement and support zone between $76.42 and $74.00. Sustained bullish momentum could see prices trending higher, with potential volatility introduced by inventory data and geopolitical developments.

Weekly Forecast

The overall market sentiment remains cautiously bullish, with strong demand projections and constrained supply likely to support oil prices. Traders should remain vigilant of geopolitical tensions and economic indicators that could introduce market volatility.