Oil prices showed little movement in Asian trading on Friday but were on track for some weekly gains, buoyed by optimistic demand forecasts and U.S. output disruptions, which countered concerns about economic slowdowns and elevated interest rates.
Both the International Energy Agency and the Organization of the Petroleum Exporting Countries projected an uptick in demand over the next two years, attributing it to China’s economic recovery and an anticipated reduction in interest rates.
Support for prices also came from an unexpected decline in U.S. crude inventories. Severe cold weather led to a 40% reduction in oil output in North Dakota, although travel restrictions contributed to a significant build in oil product inventories.
Ongoing geopolitical tensions, particularly clashes between U.S.-led forces and the Iran-backed Houthi group in the Red Sea, as well as emerging conflicts between Iran and Pakistan, added to concerns about supply disruptions in the Middle East.
These positive signals facilitated a slight recovery in prices from a challenging start to the year, with oil prices nursing a 10% decline throughout 2023.
Brent oil futures expiring in March remained flat at $79.07 a barrel, while West Texas Intermediate crude futures steadied at $73.97 a barrel. Both contracts posted weekly gains ranging between 0.8% and 1.4%.
Economic Uncertainties and Rate-Cut Speculation
Despite weekly gains, concerns about slowing economic growth and uncertainties related to interest rates tempered enthusiasm. China’s weaker-than-expected economic growth in the fourth quarter raised worries about crude demand in the world’s largest oil importer.
The strength of the U.S. dollar, reaching over one-month highs, added pressure to oil prices. Doubts regarding an imminent interest rate cut by the Federal Reserve, at least by March 2024, contributed to market hesitations.
While the Fed is anticipated to eventually reduce interest rates this year, persistent signs of robust U.S. inflation and a strong labor market have increased uncertainty about the timing and extent of these cuts.
Dismal economic data from the euro zone and indications that the European Central Bank might maintain a restrictive monetary policy in the near term also fueled concerns about oil demand.
Looking ahead, absent any significant disruptions in Middle East supply, oil markets are expected to remain well-supplied in the first half of 2024, given the modest production cuts from OPEC and record-high U.S. output.