Could Oil and Gas Prices Trend Higher After IEA Projects Sup KEY TAKEAWAYS
Greater-than-anticipated demand, OPEC+ curbs, and shipping disruptions in the Red Sea have altered a previously stable outlook for oil markets.
The International Energy Agency now forecasts supplies will fall short of demand this year.
As consumers brace for a hike in oil prices, investors ponder who might pick up the slack.
Greater-than-anticipated demand, ongoing production curbs by some oil producing countries, and persistent shipping disruptions in the Red Sea have increasingly crimped global oil supplies, altering the previously stable outlook for oil and fuel prices.
The International Energy Agency last week surprised global markets by predicting worldwide oil supplies could fall short of demand by 300,000 barrels per day this year. Previously, the IEA predicted a surplus of 800,000 barrels per day.
The IEA said global demand in the first quarter would rise by 1.7 million barrels per day, more than previously expected. Meanwhile, production likely will fall by 870,000 barrels per day, reflecting curbs in production that Organization of the Petroleum Exporting Countries and other nations, together known as OPEC+, extended earlier this month.
Rebel attacks in the Red Sea have disrupted shipping lanes, diverting tankers to longer routes. That means more oil inventory remains stuck at sea. At the same time, the IEA estimated onshore global stocks had sunk to their lowest level in eight years.
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Fuel Prices Were Expected To Rise Already; Short Supply Could Push Them Higher
Oil prices rose to four-month highs after the IEA released its report. But even before then, the U.S. Energy Information Administration (EIA) earlier last week predicted the price for Brent crude, the global benchmark, would average $88 per barrel in the second quarter. That's up from its estimate of $84 per barrel just a month ago.
Likewise, the changing supply and demand picture caused the EIA to raise its projection for average U.S. gasoline prices this year to about $3.50 per gallon, up almost 20 cents from its forecast a month ago.
Last year, Brent crude averaged $82.41 per barrel and U.S. gasoline prices averaged $3.52 per gallon. Entering the year, expectations for declining global demand growth and increased refining capacity restrained price forecasts.
Originally last December, the EIA had predicted Brent crude prices would remain essentially stable at $83 per barrel in 2024, with average U.S gasoline prices falling to $3.36 per gallon. Its Brent crude forecast fell in January, to $82 per barrel.
But just two months later, the scenario has shifted considerably.
Production Variables That Could Still Change
Consumers soon may notice the difference, and investors already are paying attention. The Energy Select Sector SPDR ETF (XLE), the largest exchange-traded fund comprising oil and gas stocks, has surged more than 7% in the past month.
What could alter the increasingly bullish outlook for oil prices? OPEC, of course, as it produces about 60% of the world's oil.
The OPEC+ bloc announced voluntary production cuts last year and has now extended those through June, with an expectation that they will remain in place through the end of the year.
OPEC's demand growth forecast for 2024 of 2.2 million barrels per day remains 900,000 barrels higher than the IEA's, the largest divergence in almost 16 years. So rising demand forecasts from non-OPEC sources won't necessarily change the coalition's mind on production curbs.
The U.S., which produces about 15% of the world's output, could pick up some of the slack. The EIA now expects the U.S. will produce 13.19 million barrels per day this year, a 260,000-barrel increase from its estimate at the end of last year.