Oil Market Grapples with Mixed Signals after Rally Fizzles

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After a steady rise in the first quarter of 2024, oil prices have been stuck in a tight range the last few weeks without a clear narrative to provide direction. 

There has been no shortage of stories involving geopolitics, OPEC+ policy, US sanctions, interest rates and China’s economy, but collectively the signals are mixed. 

This marks a turnaround from the rally that defined the first three months of the year.

In early April, Brent’s 50-day moving average topped the 200-day moving average, a moment referred to as the “golden cross,” which signals bullish momentum.

Inventory data supported price rally

One reason for the run-up in prices was a tightening market. 

Global oil inventories declined in seven of eight months from August through March, according to Ursa Space data, meaning supply fell short of demand.

China has been a contributing factor. The country’s inventories have been trending lower since last year, buoyed by signs of improving economic conditions.

Data showing China’s manufacturing and retails sectors strengthened in early 2024 raised hopes for robust oil demand growth. 

The good news comes amid a property crisis that won’t go away and still-fresh memories of last year’s disappointing performance when efforts to kickstart the economy failed to materialize.

US sanctions reemerge as talking point

One consequence of Iran’s attack on Israel was the passage of new US sanctions, which broaden existing penalties aimed at the country’s oil sector.  

However, President Biden has the authority to invoke waivers to avert price spikes in the name of national security, a strong likelihood in an election year. 

Iran’s oil exports recently rose to multi-year highs, which some analysts attribute partly to relaxed enforcement of existing sanctions, a notion denied by the Biden administration.

Iran’s crude inventories have stabilized in 2024, consolidating at their lowest levels in at least five years after a long period of declines.

Washington also took aim (again) at Venezuela. The Treasury Department reimposed sanctions after concluding the Maduro regime had failed to satisfy its commitments to hold a fair and competitive election this year.  

US Gulf Coast refiners resumed imports of Venezuelan oil during the six-month trial period. The only company allowed to import Venezuelan crude oil after sanctions were imposed in 2019 was Chevron, which received a special license in 2022.

Venezuela’s sales to US refiners since last October coincided with a decline in the country’s crude oil inventories, suggesting its production hasn’t been able to keep pace with exports.

A pillar of the oil market since late 2022 has been production cuts by OPEC+ members, which have held back enough supply to offset rising output from producers outside the group (e.g. US, Brazil, Guyana). 

Removing barrels from the market has been especially important given the concerns over demand with major economies dealing with high interest rates.

But this dynamic won’t last forever. One or more of the issues discussed above will evolve and price direction should become clearer. 

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