Supply constraints dominate market sentiment, driving Brent higher

Front-month ICE Brent has gained by $1.55/bbl on the day, to $87.26/bbl at 09.00 GMT.

PHOTO: Aerial view of an oil refinery and fuel storage tanks in Texas, US. Getty Images

Upward pressure:

The US Energy Information Administration (EIA) has forecast the Brent spot price to average $85/bbl this year - an upward revision of $3/bbl from its March outlook. It has explained that the additional oil production cuts announced by OPEC and its allies, including Russia, will tighten the oil market this year and drive Brent’s spot price higher.

The EIA has also lowered its global liquid fuel production forecast for this year by 300,000 b/d from its March forecast.

Bearish short positions in the Brent futures contract have fallen to their lowest levels since late January, according to Reuters analyst John Kemp. This is after major OPEC+ members announced oil production cuts starting in May, says Kemp.

“Investors bought petroleum futures and options at the fastest rate for more than three years after Saudi Arabia and other OPEC⁺ producer group members announced voluntary cuts in oil output,” Kemp has written in a Reuters column.

Downward pressure:

Commercial US crude inventories grew by 597,000 bbls on the week, to 475.55 million bbls on 7 April, according to official weekly figures from the EIA. The weekly stock build has surpassed the 377,000-bbl build estimated by the American Petroleum Institute (API) on Tuesday.

The International Monetary Fund has downgraded this year’s global GDP outlook citing macroeconomic uncertainties caused by the “financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three years of COVID.”

The US Federal Reserve (Fed) released the minutes of its Federal Open Market Committee (FOMC) meeting held in March. The minutes indicate that the US economy is predicted to enter a recession later this year, partly because of headwinds from the recent banking sector turmoil.

“Recent developments [in the banking sector] are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,” the FOMC said. It added that the Fed is “highly attentive to inflation risks.”

By Konica Bhatt

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