Oil prices edge higher on increased demand expectations

Oil prices gained strength on Monday, with WTI price touching the $78.5 per barrel level. If WTI price declines, it may encounter further support near $75.0 per barrel, while resistance may be found near $84.0 per barrel.

OPEC released its monthly report on Monday, stating that the oil demand outlook is not waning and providing support for oil prices. According to the report, oil market fundamentals remain robust and oil demand in the US and China has not weakened.

OPEC+ kept its output policy unchanged at its latest meeting, maintaining its recent cuts by Russia and Saudi Arabia, which have already been extended till the end of the year. Russia and Saudi Arabia recently reaffirmed their commitment to maintain these voluntary supply cuts. Many market analysts even predict that the rate cuts will be extended into the first quarter of 2024. Oil prices, however, continued to decline, even on concerns of limited supply. 

Geopolitical risks have supported oil prices within the past month. The crisis between Israel and Hamas continues, propping up oil prices. Especially fears of a potential Iranian involvement are buoying oil prices. Fears that the war in Israel would disrupt oil supply are easing, however, causing oil prices to slip. The crisis seems to be contained so far and risks of the war spreading in the region abate. 

Oil prices are kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. FOMC members have voted to keep interest rates unchanged at a target range of 5.25% to 5.50%. 

Powell delivered a hawkish speech last week, stating that policymakers are not confident that they have achieved a sufficiently restrictive stance to return inflation to the Fed’s 2.0% target. Powell’s comments raised rate hike expectations, further restricting oil demand outlook and putting pressure on oil prices.

The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months. Even if the Fed has reached its interest rate ceiling though, rates are likely to stay high for longer, driving oil demand outlook and oil prices down. A lot is riding on this week’s US inflation data, with CPI data due on Tuesday and PPI data on Wednesday.

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Written by:
Myrsini Giannouli

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