Crude Oil: OPEC Is Key

Our Commodity & Energy Strategy service remains upbeat on the cyclical outlook for crude oil prices.

BCA | Commodity Energy Strategy

T he spot price of Brent crude oil fell below $100 last week amid rising investor risk aversion and dollar strength. However, the cyclical backdrop remains supportive for oil prices and a sustained global recession would be necessary to keep crude prices below $100 for long.

Note:

  • The physical oil market is tighter than suggested by surging crude stocks.
  • Oil product inventories are drying up, even as refinery production is on track with last year’s trend.

This points to a recovery in underlying U.S. energy demand beyond the seasonal increase. Meanwhile, OPEC spare capacity is approaching critical levels and will not be able to accommodate the upcoming seasonal upswing in global oil demand at these prices.

Our Commodity & Energy Strategy service expects OPEC to reaffirm its support for a $100 floor for the OPEC basket price at its June 14 Vienna meeting. Barring this, Brent prices could briefly plunge toward their previous $75-85 support channel. However, this price level would not be sustainable, as emerging market demand will outpace OPEC’s ability to supply the global economy with oil.

Bottom line: In the absence of a policy catalyst, oil prices remain vulnerable. But as long as the global economy does not slide back into recession, medium-term prospects for oil prices are good.

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