Oil bounces back amid Middle East tensions as Opec forecasts robust summer market

Oil prices rose on Friday on the back of heightened tension in the Middle East, amid fears that wider conflict would hinder output from the region.

However, a price drop is predicted over the next few weeks as fewer US interest rate cuts are expected this year.

Brent, the benchmark for two thirds of the world’s oil, settled 0.71 per cent higher at $90.45 a barrel. West Texas Intermediate, the gauge that tracks US crude, rose 0.64 per cent to settle at $85.66 a barrel.

On Thursday, Opec held firm to its forecasts for global oil demand and economic growth in 2024 and 2025, with expectations of “robust” summer months for the crude market.

The group has forecast oil demand growth of 2.2 million barrels per day for this year and 1.8 million bpd for 2025, sticking to estimates it has made since February, Opec said in its latest monthly oil market report.

“Crude oil futures prices continued their upward trajectory in March, driven by increasingly positive sentiments regarding oil market fundamentals, amid an elevated risk premium,” the group said.

Opec projects the market to record strong activity during the summer months, underpinned by higher demand for transportation fuels and an overall healthy global economy, potentially supported by a more accommodative monetary stance by the US Federal Reserve in the third quarter.

This upbeat outlook, however, “warrants careful market monitoring, amid ongoing uncertainties, to ensure a sound and sustainable market balance”, the Vienna-based group said.

Opec also stuck to its global economic growth projections of 2.8 per cent in 2024 and 2.9 per cent in 2025. It previously forecast “robust” expansion in economic activity in the second half of this year.

“Despite some downside risks, the continuation of the momentum seen in the beginning of the year could result in further upside potential for global economic growth in 2024,” Opec said.

“It is anticipated that domestic political and geopolitical developments will likely not significantly affect growth momentum.”

Growth in the US, the world's biggest economy and top consumer of crude, was slightly revised up to 2.1 per cent for 2024. Projections for the eurozone, Japan, China, India and Brazil were unchanged, while Russia's was upgraded on a stronger economy.

“There has been a significant decline in inflation across most major economies in recent months, although some have observed relatively sustained headline and core inflation figures in February and March,” Opec said.

“The response of central banks to this consistent inflationary trend in the coming months remains uncertain,” it added. The US Federal Reserve is expected to decide on interest rates in its June meeting.

Meanwhile, oil prices fell on Thursday, as investors braced for an escalation of diffused Middle East tensions following an Israeli air strike that killed relatives of the leader of Hamas and potential hostilities between Israel by Iran.

Brent, the benchmark for two thirds of the world’s oil, was down 0.42 per cent to $90.10 a barrel at 5:06pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 0.65 per cent lower at $85.65 a barrel.

Crude began the day trading up and held steady near six-month highs before paring gains.

Both contracts gained more than 1 per cent at the end of Wednesday trading after an Israeli air strike killed a number of children and grandchildren of the Hamas political leader Ismail Haniyeh.

Israel and Iran, meanwhile, have traded threats. Israeli Foreign Minister Israel Katz said on Wednesday that his country will retaliate against Iranian territory if it is attacked.

Mr Katz made the public warning in posts on X directed at Iran's Supreme Leader Ayatollah Ali Khamenei, shortly after the Iranian leader said Israel was an “evil regime” that “must be punished” for a deadly attack on the Iranian embassy compound in Damascus on April 1.

Oil prices started the week lower as talks between Hamas and Israel to end the war in Gaza took place in Cairo, but they have hit a stalemate as Hamas has reportedly raised several objections to proposals.

Disagreements over the return of displaced Palestinians in Gaza and vague language on the absence of guarantees for a permanent ceasefire are stumbling blocks in the truce talks, sources told The National on Wednesday.

“The current geopolitical environment continues to provide support to oil prices,” analysts at Amsterdam-based ING Group wrote on Thursday.

The oil market also has to contend with two key data points from the US – inflation and crude stockpiles.

US inflation increased again last month, dampening hopes that the Federal Reserve will cut interest rates in June, and also signalling higher-for-longer rates in the UAE and Saudi Arabia.

The Consumer Price Index rose 0.4 per cent in March, unchanged from its monthly gain in February, the Labour Department reported on Wednesday. But it rose on an annual basis at 3.5 per cent, a larger increase than the 3.2 per cent yearly rise in February.

Meanwhile, inventories of US crude, gasoline and distillates climbed last week on low crude exports, the Energy Information Administration said on Wednesday.

Crude inventories jumped by 5.8 million barrels to 457.3 million barrels in the week ended April 5, way above a Reuters poll of analyst expectations for a 2.4 million barrel increase, the Washington-based EIA said.

Oil prices recorded gains after the economic reports were published.

Investors will also be looking for clues from another report from the International Energy Agency due on Friday.

Opec+ made no policy changes following an online meeting last Wednesday, implying that voluntary output cuts of 2.2 million barrels per day would remain in place until the end of June.

It also said it would continue to “closely assess” market conditions and that member countries were ready to take additional measures if required. A full ministerial gathering will be held in Vienna in June.

“We continue to anticipate that market conditions this summer will allow for some of the voluntary Opec production cuts to be unwound, but this should be a gradual process. Hence, we still look for a modest decline in prices toward the end of the year,” analysts at Swiss bank UBS said.

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