Solid demand, tighter market balance may help stabilise oil price

The emergence of Covid-pandemic in early 2020 marked the beginning of a period of significant bouts of volatility in commodity markets.
For crude oil, in particular, major global events represented substantial shocks to markets, leading to extreme upward and downward swings in relatively short periods of time.
Initially, the Covid-pandemic represented a major negative shock to demand, given large-scale global lockdowns.
This led to a temporary collapse in market conditions, as inventories were above full capacity whilst demand was at multi-decade lows. The price of Brent crude, the most relevant benchmark for global oil markets, bottomed at $19 per barrel mark in April 2020, QNB said in an earlier report.
After the peak, crude prices corrected significantly. On the demand side, given the slowdown in advanced economies, and the relatively moderate strength of the reopening of economic activity in China from ‘Zero-Covid’ policies.
On the supply side, Opec+ increased output to counterbalance the expected excess demand, while major economies (US, Europe, and China) managed emergency releases of strategic oil reserves.
As a result, there was a correction in oil prices in 2023 to an average of $82 per barrel, QNB noted previously.
Importantly, supply and demand balanced, stabilising prices around the annual average, which fluctuated between a low of $71 and a maximum of $94 per barrel. These are milder variations relative to the large swings in 2022, when prices had moved between a low of $75 and the peak of $128 per barrel.
Last month, oil prices gained amid challenges mainly due to the prospects of higher Opec+ supplies. Oil prices finished higher in June, lifted by resurfacing geopolitical tensions and the prospect of rate cuts by key central banks in the second half of the year, points out National Bank of Kuwait (NBK).
Prices recovered from their sharp post-Opec+ meeting falls of early June when markets grew concerned that the group’s decision to unwind 2024’s voluntary production cuts from October onwards and into 2025 would push the market into surplus territory.
NBK maintains its forecast for Brent to average $85/barrel in 2024, helped by projected solid oil demand and tighter market balances in this quarter.
From fourth quarter (Q4) onwards, market balances are expected to loosen with the scheduled unwinding of Opec+ supply cuts, but these will only take place, Opec+ says, if market conditions warrant them and at a pace slow enough to make the effect on balances and prices limited and manageable.
Downside risks to the price outlook are worth highlighting, however. The most important is global economic growth and the potential for activity to underwhelm in H2-2024, which would likely require non-OECD and especially Chinese economic growth to slow.
Partially offsetting this, though, would be the fairly good prospect of an uptick in economic activity in OECD countries, helped by looser monetary policy.
Many analysts believe crude oil prices are expected to stabilise near current levels, as physical markets will tighten on the back of decelerating supply growth and still robust global demand.