Oil heads to halt its series of gains with oversupply

Oil fields

Crude oil fell across both major benchmarks today, Brent and West Texas Intermediate (WTI), by approximately 0.6% and is on track to snap a three-day winning streak.

These declines come after a larger-than-expected buildup of US inventories and monetary policymakers lowering their expectations for an interest rate cut, in addition to fears of a flood of inventories in the coming years.

Yesterday, we witnessed the Federal Reserve’s decision to keep current rates unchanged, but what has changed is the Summary of Economic Projections for members, who now tend to cut only once instead of twice.

I believe that this would reinforce the narrative that the beginning of a one-time interest rate cut will not mean the beginning of the easting path and will not even mean the end of the tightening one. Rather, it may only come to adjust the degree of monetary tightening so as not to exaggerate it – this is what we actually witnessed at the European Central Bank last week.

This strict adjustment is what disturbed the oil markets and pushed them to give up their gains that they were able to recover after the losses that came from an unexpected increase in US inventories by 3.7 million barrels last week.

Even in the long term, excess supply may expand in 2030 to levels not seen since the spread of the COVID-19 pandemic – when futures prices plunged below zero – in light of the acceleration of the shift towards renewable sources of energy, according to the International Energy Agency. Therefore, it may seem justified for markets to remain pessimistic about the exhibition surplus for an extended period.

On the other hand, the agency expects oil demand growth to peak in 2029 and will be higher by 3.2 million barrels per day in 2030 compared to what it was in 2023, driven by demand growth from Asia. However, forecasts also indicate that demand from advanced economies will decline to reach 42.7 million barrels per day in 2030. These expectations come after the World Bank raised its outlook about the future growth of the world economy, thanks to the expansion of the US economy.

On the geopolitical side, it seems that concerns about the safety of global energy supplies may soon return to the forefront, with fears that the conflict in the Middle East will expand widely on more than one front, whether in Lebanon or the Red Sea, in light of the unprecedented escalation of military actions on both fronts.

This escalation comes with the absence of any immediate horizon for reaching a ceasefire in Gaza, which would lead to a calming of the escalation in the entire region. This is because the negotiations are still stuck as a result of the disagreement over the terms of the permanent ceasefire, which Israel does not want, as it seems, at least implicitly – and this is what the leaders of the most extreme right in the war government are talking about publicly.