Oil is heading towards its second consecutive quarterly loss, which hasn't happened since 2019. The increased production and slower-than-expected demand are putting pressure on prices. JP Morgan notes that supply has recovered and unexpectedly increased from various sources, including the United States, non-OPEC countries, as well as Nigeria, Iran, and Venezuela. According to the bank, the OPEC+ cuts are insufficient to balance the market. Therefore, they have lowered the average Brent price from $90 to $81 per barrel.
Quarterly Oil Dynamics
The oil market in 2023 is a combination of disappointment regarding global demand and surprise regarding production. At the beginning of the year, production cuts in Russia were expected due to Western sanctions and the rapid growth of the Chinese economy after emerging from lockdowns. However, Moscow managed to redirect flows towards India and China, and the decrease in interest rates indicates that Beijing is not satisfied with the pace of GDP expansion.
Such divergent dynamics of demand and supply have raised concerns among investors that the International Energy Agency (IEA) will worsen its forecasts, leading to a decline in Brent prices to the lowest levels since early May. In reality, the IEA has maintained optimism. They have increased their estimates of oil consumption growth by 200,000 barrels per day (bpd) to 2.4 million bpd. The organization believes that 60% of this expansion will be driven by China.
The supply forecast has also been raised by 200,000 bpd to 101.3 million bpd. With such dynamics, the IEA believes that prices will rise in the second half of 2023. However, in 2024, supply growth of 1 million bpd will outpace demand growth of 860,000 bpd, which will lower the price of oil.
In my opinion, the dynamics of Brent in the second half of this year will depend on the pace of China's recovery and the stability of the U.S. and European economies in response to the tightening monetary policies of the Federal Reserve (Fed) and the European Central Bank (ECB). If China manages to accelerate due to monetary stimulus, the eurozone exits recession, and the U.S. achieves a soft landing, global oil demand will rise, leading to price increases.
There are several signs pointing to an optimistic scenario. For instance, the number of drilling rigs in the U.S. continues to decrease, indicating a reduction in production volumes in the near future. China's oil refinery throughput in May reached the second-highest level ever recorded.
U.S. Drilling Rig Dynamics
Price growth depends not only on demand but also on stable supply. In this regard, the OPEC production cut of 464,000 bpd to 28.07 million bpd is good news for the North Sea bulls.
Technically, on Brent's daily chart, the implementation of the Broadening Wedge pattern continues. A necessary condition for buying is a price consolidation above the fair value at $75.75 per barrel. Transitioning to forming long positions towards targets at $79 and $81.7 makes sense upon breaking resistance at $77.