Oil prices rally as supply concerns outweigh declining demand

Oil prices dipped in early trading on Thursday but rallied later in the day and WTI price surged above $84.1 per barrel. If WTI price declines, it may encounter support near $80.7 per barrel, while resistance may be found near $86.2 per barrel.

Oil prices dived early on Thursday as weak US economic data fueled demand worries. US GDP data for the first quarter of 2024 released on Thursday were disappointing, indicating that US economic growth is slowing down. The US economy expanded by only 1.6% in the first quarter of the year, missing expectations of 2.5% and falling considerably below the 3.4% expansion registered in the final quarter of 2023. Slow economic growth is reducing the oil demand outlook putting pressure on oil prices.

Geopolitical tensions are boosting oil prices, however. Supply concerns provide support for oil prices, as the crisis in the Middle East threatens to disrupt oil distribution. Tensions around the Red Sea area raise concerns that hostilities may spread further in the Middle East, affecting oil supply and distribution. The crisis between Israel and Iran seems to have been diffused for the time being, putting pressure on oil prices.

US crude oil inventories released on Wednesday showed that US crude stockpiles fell short of expectations. The US Energy Information Administration reported a weekly crude stockpile draw of 6.4M barrels for the week to April 19th, against expectations of a 1.6M barrel raise and following a build by 2.7M barrels the week before.

OPEC+ kept existing output cuts in place at its latest meeting, boosting oil prices. OPEC kept its output policy steady in April, maintaining its voluntary production cuts of 2.2 million barrels per day. In addition, Russia may be forced to reduce its oil output even further, as a result of lower refinery runs due to Ukrainian drone strikes. Iraq will continue to reduce its crude exports by another 130K barrels per day to compensate for exceeding its OPEC+ quota in January. 

Oil prices are also kept in check by high Fed interest rates. The US Federal Reserve kept interest rates unchanged at its latest policy meeting within a target range of 5.25% to 5.50%. Market expectations of rate cuts dropped sharply after the release of the US inflation report last week. Odds of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.

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Written by:
Myrsini Giannouli

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