Oil Ends Week Higher Amid Ongoing Geopolitical Tensions, Fading Rate Cut Hopes Cap Gains
Oil prices experienced a volatile week, with June ’24 WTI hitting as low as $80.88/Bbl on Tuesday before finishing higher at $83.85/Bbl on Friday, posting a weekly gain of $1.63/Bbl. The U.S. GDP growing at only 1.6% compared to the expected 2.4% in Q1 2024 has further fueled fears of an economic slowdown, weighing on both equities and oil prices this week.
Furthermore, the Fed’s preferred inflation measure, the PCE, rose 0.3% in March and 2.8% Y-o-Y, remaining unchanged from February. Three straight months of sticky inflation data indicate that progress toward the Fed's 2% target may have stalled, possibly prompting the Fed to maintain higher rates for longer.
Prices, however, found support as Israel stepped up airstrikes on Gaza’s Rafah and prepared for a potential all-out war with Hezbollah. Meanwhile, the prompt spreads (M1-M2) for WTI and Brent rose to 73c and $1.30, respectively, up from 64c and 78c last week. A steeper or more backwardated curve signals tightness in the market, and this encourages withdrawals from storage.
In mid-April, when WTI was trading around $88/Bbl, a geopolitical risk premium of $5-10/Bbl was estimated to be priced in due to the Middle East tensions. This premium appears to have eased recently following Israel's limited retaliation against Iran last week.
AEGIS believes that oil prices are now more fundamentally priced, with part of the war premium having been removed. As 2Q progresses, the market may start looking forward more to supply and demand balances. AEGIS maintains a bullish outlook on the curve as OPEC+ supply cuts continue to support the market amid declining inventories.
Additionally, despite President Biden's new and expanded sanctions targeting Iran's oil sector this week, analysts expect minimal impact on Iranian oil exports (1.5 MMBbl/d), largely due to potential lenient enforcement and possible waivers by the administration to avoid oil price spikes before the 2024 elections.