Oil is one of the most important commodities in the global economy. It is in the eye of the hurricane all the time and even more so when the major world powers are facing periods of crisis or economic growth – sometimes both. This analysis will focus on the fundamentals of West Texas Intermediate (WTI) crude oil, one of the two main traded oil contracts.
The barrel has had a slightly clearer trend in this fourth week of January 2024, compared to the third week but has remained between the area of $72.50 and $75.30.
In spite of this price increase, traders have been pondering different factors that have interfered in the price, such as macroeconomic data, information released by OPEC, conflicts between certain countries in different parts of the world, and issues associated with the weather.
To begin with, the world’s second largest economy, China, on January 16, 2024, released its GDP of 5.2%, for the year 2023. This data was lower than expected and analysts were forecasting 5.3% growth. It has kept the market a bit agitated and especially crude oil.
Geopolitics and OPEC
Likewise, geopolitical factors in different parts of the world have to be taken into account. The U.S. military confrontations with the Houthi rebels in Yemen, the war between Russia and Ukraine, as well as the dispute between Israel and Palestine, are beginning to have a significant impact on the geopolitical scenario. These events are beginning to influence markets and global economic dynamics.
Traders were also on the lookout for statements to be announced by the Organization of the Petroleum Exporting Countries, OPEC, and the latter has announced that it is maintaining its oil demand estimate for 2024 and 2025. The organization said that it maintains its growth estimates for global oil demand for those years, of 2.2% and 1.8%, respectively.
Cold weather snap
With respect to weather, extreme cold in one part of the United States is affecting oil production in North Dakota, the third largest producing state. It is also causing production bottlenecks in other states. Despite this, the strength in the stock market suggests strong demand for oil in 2024 rather than signs of a slowdown in the economy.
The US Energy Information Administration (EIA) will today (Wednesday) announce data on oil inventories, with a forecast of -3000m barrels.
In summary, there are a number of different factors weighing in on different sides of the oil trade. OPEC is labouring to maintain a minimum target oil price, but at the same time the perceived economic slowdown in China is continuing to weigh down the oil price. That is likely the reason we have seen little upside price action, despite disruption of the Red Sea tanker trade by Houthi rebels.
Bloomberg notes that Russia is struggling to actually sell oil in the market, not because of international sanctions, but because demand is slack. As recent as this week 16 Russian tankers are known to be at sea with 11m barrels of crude oil with nowhere to go. That does not look like a tight oil market for traders. The ball is in OPEC’s court.