A fire broke out on the British oil tanker Marlin Luanda after a Houthi missile strike in the Gulf of Aden earlier this year. Geopolitical tensions are one factor in the recent rally. Photo / VesselFinder
A fire broke out on the British oil tanker Marlin Luanda after a Houthi missile strike in the Gulf of Aden earlier this year. Geopolitical tensions are one factor in the recent rally. Photo / VesselFinder
Traders are asking how much further oil can rally after prices climbed above $90 per barrel this week for the first time since October.
Brent crude, the international benchmark, passed $91 per barrel on Friday, taking its gains for the year to 18 per cent. The US benchmark West TexasIntermediate has been even stronger, rising 21 per cent.
The moves upward in the past two weeks, after a month in a tight range, have been driven in part by fears of a widening conflict in the Middle East, including the potential for an Iranian backlash to a suspected Israeli attack on its consulate in Damascus.
Analysts said prices are likely to remain elevated even if political tensions begin to ease, because economic growth in the US, Europe and China is likely to boost demand, and Opec+ constrains supplies.
“It’s supply-and-demand with geopolitics thrown in on top,” said Paul Horsnell, global head of commodities at Standard Chartered.
The latest report from the International Energy Agency forecasts that supply growth from outside of the Opec+ cartel will reach 1.6 million barrels per day this year, down from 2.4m in 2023.
“A lot of the market thought that the growth of last year would continue unabated this year. It hasn’t,” said Horsnell, who expects prices to remain above $90 per barrel in the coming months.
With Opec+ still “holding the cards on supply”, prices are likely to remain elevated so long as major developed economies don’t sink into a deep recession, said Ehsan Khoman, head of commodities at MUFG.
He noted, however, that Opec+ countries will probably ease their production restrictions if oil prices rise above $100 per barrel in order to avoid “eating into their own exports.”
What will the ECB say about interest rate cuts?
Eurozone inflation has fallen tantalisingly close to the European Central Bank’s target, and the bloc’s economy seems stuck in the doldrums, yet policymakers are widely expected to keep interest rates on hold when they meet on Thursday.
The main reason for rate-setters’ caution is the continued stickiness of services inflation, which has held at an uncomfortably high annual rate of 4 per cent for five months in a row, even as headline inflation slowed to 2.4 per cent in March.
The ECB’s worry is that wages will keep rising rapidly as workers seek to regain the purchasing power lost in the worst cost of living crisis for a generation, which will keep pushing up prices in the labour-intensive services sector.
There is broad consensus among ECB governing council members that they should wait until their June meeting to decide whether to start cutting rates, when they will have more data to assess if wage growth is slowing enough to ease services inflation.
There are still doubts over how strong a signal the ECB will send about a likely June rate cut.
Mariano Cena, an economist at Barclays, thinks it could do this by changing the wording of its policy statement so it no longer says interest rates have to be “maintained for a sufficiently long duration” to bring inflation to its 2 per cent target.
However, BNP Paribas economist Paul Hollingsworth thinks it will be left to ECB president Christine Lagarde’s press conference after the meeting to provide guidance without tying the central bank’s hands.
“She could suggest that the ECB will assess in June whether the conditions have been met to begin reducing the degree of policy restriction,” he said.
Did US core inflation slow in March?
Investors will be looking to see if the latest US inflation data will give the Federal Reserve more confidence to proceed with interest rates cuts this summer.
The headline inflation number from the Bureau of Labor Statistics on Wednesday is forecast to be 3.5 per cent for March, up from a rate of 3.2 per cent the previous month, according to a poll of economists by Bloomberg, last month. The rise is expected to be due to an increase in energy prices.
Jay Powell, Federal Reserve chair. Officials at the central bank’s meeting in March indicated they expected to make 0.75 percentage points of cuts this year, but economic data showing a resilient and growing economy has added doubt to that. Photo / AP
However core inflation, the Fed’s preferred measure as it strips out the volatile food and energy segments, is forecast to have softened modestly to 3.7 per cent, down from 3.8 per cent in February.
Indications that inflation is falling closer to the Fed’s 2 per cent target have been harder to come by, in part because housing inflation has remained elevated. Analysts at TD Securities say that housing inflation last month was likely to be mixed.
Progress on core inflation could sway the Federal Reserve as it weighs when to begin cutting interest rates.
Officials at the central bank’s meeting in March indicated they expected to make 0.75 percentage points of cuts this year, but economic data showing a resilient and growing economy has put doubts in investors’ minds.
Markets are currently betting on just under three cuts by December.
