Crude oil price has been fluctuating within a sideways track since yesterday, as it faces some resistance at $86.90 per barrel, while the EMA50 continues to provide positive support. The price needs to gather more positive momentum to resume the bullish trend that targets $88.05 as the next main station.
China’s economic slowdown weighs on oil demand outlook
One of the factors that is limiting the upside potential of crude oil price is the slowdown in China’s economic activity, especially in the services sector, which accounts for more than half of its GDP. China’s services sector activity growth in August was less than expected, as the Caixin/Markit services Purchasing Managers’ Index (PMI) fell to 46.7 from 54.9 in July, well below the 50-mark that separates growth from contraction.
China is the world’s largest oil importer and consumer, and any signs of weakness in its economy could dampen the demand for crude oil in the global market. Moreover, China has been struggling to contain the spread of the Delta variant of the coronavirus, which has forced some regions to impose lockdowns and travel restrictions, further hurting the consumption of fuel and energy.
OPEC+ supply policy and US shale production add uncertainty to oil market
Another factor that is creating uncertainty in the oil market is the supply policy of the Organization of the Petroleum Exporting Countries and its allies (OPEC+), which have been gradually increasing their output since May 2023, after cutting it sharply in 2020 and early 2021 to support the market amid the pandemic. OPEC+ agreed in July 2023 to boost production by 400,000 barrels per day (bpd) each month until December 2023, when it will review its policy
However, some analysts have questioned whether OPEC+ will be able to stick to its plan, given the uneven recovery of oil demand across different regions and the risk of new virus variants. Some OPEC+ members, such as Saudi Arabia and Russia, have indicated that they are ready to adjust their output if needed to balance the market. On the other hand, some OPEC+ members, such as Iraq and Nigeria, have been struggling to comply with their quotas and have been producing more than their allocated share.
Meanwhile, US shale oil producers have also been increasing their spending and production in response to higher oil prices, which could add more supply to the market and put pressure on crude oil price. According to Rystad Energy, the reinvestment rate of US shale oil producers hit its highest level in three years in the second quarter of 2023, as they spent $17 billion on drilling and completing wells, up from $12 billion in the first quarter. US crude oil production rose to 11.4 million bpd in July 2023, up from 11 million bpd in June 2023.
Oil price outlook remains bullish despite challenges
Despite these challenges, some analysts and experts remain bullish on the outlook for crude oil price, citing the strong recovery of oil demand in some regions, such as Europe and North America, where vaccination rates are high and mobility restrictions are easing. They also point out that global oil inventories have been declining steadily since mid-2020, as supply has been lagging behind demand, creating a deficit in the market.
According to the International Energy Agency (IEA), global oil demand is forecast to rise by an average of 2 million bpd in 2023, to 101.9 million bpd, with the non-OECD accounting for 87% of the growth and China alone making up more than half of the global increase. The IEA also expects global oil supply to increase by 1.7 million bpd in 2023, to 99 million bpd, with OPEC+ accounting for most of the growth. This implies that the market will remain tight and supportive of higher oil prices.
Some analysts have even predicted that crude oil price could reach $100 per barrel by the end of 2023 or early 2024, as demand outstrips supply and inventories fall below their five-year average. However, they also acknowledge that there are many uncertainties and risks that could derail this scenario, such as new virus variants, geopolitical tensions, environmental regulations, and technological innovations.
