Oil Price Commentary: Insights into Recent Trends and Drivers

Oil prices have recently declined as fears of wider conflict in the Middle East receded following Iran’s decision not to retaliate against an Israeli strike.

The chart below compares last week’s Brent Swap Forward Curve close to the previous week’s close. During this period, the May contract saw a decline of over $3, reflecting the market’s reduction of the Middle East Risk Premium.

Despite falling in recent days, Crude price remains healthy for a number of reasons. Increased geopolitical tensions have been partly responsible for the upward trend year to date, with Brent reaching $90 for the first time in nearly six months after Israel bombed Iran’s consulate in Damascus on April 1st. However, analysts have suggested that supply disruptions have also played a significant role. To list a few;

• Mexico has announced plans to cut exports by 330,000 barrels a day in May to favour supplying local refineries.
• Russia faces challenges in placing its oil due to intensified sanctions.
• Since March, Indian refiners—Russia’s second-largest buyer since 2022—have begun rejecting tankers owned by Sovcomflot, Russia’s state-owned shipping company, in response to US sanctions (Source: Reuters).
• The biggest supply disruption stems from OPEC+. In November, the group pledged to reduce output by 2.2m barrels a day (b/d), equivalent to 2% of global production. Furthermore, several members confirmed in March the extension of these cuts until the end of June.

Conversely, bearish indicators are emerging from Non-OPEC+ nations, particularly led by the US, which is anticipated to propel global supply growth through 2025 (Source: EIA Oil Marker Report- April 2024).

Economic uncertainties, inflation, and potential delays in rate cuts, alongside a significant increase in US stockpiles, are exerting downward pressure on Crude prices. According to the EIA, US Crude inventories surged by 2.7 million barrels to reach 460 million barrels in the week ending April 12, with the Gulf Coast export hub experiencing its most substantial increase since April 2023. Meanwhile, the number of oil rigs in the US reached its highest level since September last week, as reported by LSEG.

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