What's Affecting Oil Prices This Week? (June 26, 2023)

The price of Brent crude ended the week at $74.55 after closing the previous week at $76.61. The price of WTI ended the week at $69.51 after closing the previous week at $71.78.  

The oil prices continue to be dampened by concerns about future rate hikes by central bankers and the strength of future economic growth.

On June 22, the U.S. Federal Reserve Chairman stated that the Federal Reserve would be cautious in raising rates while indicating that at least one more rate increase is needed this year–and two increases is a possibility. The chairman also reiterated that the Federal Reserve is still intent on pushing the inflation rate down to 2.0%, which is less than half of the current rate. It also appears that the Federal Reserve is planning to tighten further by accelerating the reduction of its bond and mortgage-backed securities portfolio. The signaling of further tightening is happening within the context of the U.S. economy slowing down. The recent PMIs released earlier in June indicate that the U.S. manufacturing sector continues to contract with the manufacturing PMI decreasing to 46.3, while the PMI for the service sector decreased to 54.1. The resulting composite PMI decreased to 53.0 from 54.4 in May. The GDP nowcast from the Federal Reserve Bank of Atlanta is estimating that GDP growth in the U.S. for 2Q will be 1.9%. As such, while the U.S. economy is showing some weakness, the U.S. economy continues to grow, and the labor market remains relatively strong. Given those conditions, plus the fact that 2024 is a presidential year, it is likely that the Federal Reserve will return to rate increases this year.

The Eurozone’s economy continues to show signs of weakness. The initial PMI for June shows that the manufacturing sector fell to 43.6 from 44.8 of the previous month. The PMI for the service sector decreased from 53.1 to 52.4 and the composite PMI decreased from 53.8 to 50.3.

China is taking action to boost its economy; although, so far, the action has been relatively minor. The People's Bank of China (PBOC) reduced its benchmark loan prime five-year rate last week by 10-basis points, which is the first rate cut in 10 months. There are rumors that the China is planning to issue around one-trillion yuan ($140 billion) in the form of special treasury bonds and to implement less-restrictive rules to support investment in real estate. The more accommodating monetary policies are available to China because China is not facing inflationary pressures.

The geopolitical development drawing headlines pertains to Russia and the revolt that was initiated by the Wagner Group. The revolt ended suddenly with the leader of the Wagner Group, Yevgeny Prigozhin, agreeing to leave for Belarus and for the Wagner troops to head back to their bases. There are some pundits saying that Putin has been weakened, and others are spinning a range of theories–some more imaginative than others. At this time, we are hesitant to spout our own theories, given the range of unknowns surrounding the episode. So far, however, the incident does not seem to have any significant impact on the Russia-Ukraine war nor on the oil markets.

With respect to the fundamental supply/demand outlook, in our latest quarterly update, we have reduced our forecasted growth in oil demand to 1.90 MMbbl/d for 2023 from our previous forecast of 2.11 MMbbl/d. In conjunction with our supply forecast, we are still forecasting that demand will outpace supply in the third and fourth quarters.

During the upcoming week, we are expecting that the price of Brent crude will remain under $77.00.

For a complete forecast of refined products and prices, please refer to our Short-term Outlook.

About the Author: John E. Paise, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.