Will oil breach $100-level in 2024?

Oil prices extended their gains last week, amid expectations that oil will continue to recover in the second half of this year.

Brent crude recorded weekly gains of 0.4%, reaching $86.54 per barrel, while US benchmark WTI crude rose by about 2.1% in the same week to $83.16.

During the first half of 2024, Brent crude jumped 13.45%, while WTI crude increased by 13.75%. This rise was backed by growing demand and escalating geopolitical concerns.

Many reports have pointed out that oil may maintain its upward trajectory, breaking the $100 barrier this year, amid ongoing geopolitical concerns. However, expectations for global economic growth and the increase in oil demand may limit gains.

OPEC Forecasts Higher Demand

In its June’s report, the Organization of the Petroleum Exporting Countries (OPEC) maintained its forecast for relatively strong growth in global oil demand in 2024. OPEC said that it would switch its focus to the projected demand for OPEC+ crude, indicating that the alliance is now the main forum for cooperation in the market.

OPEC also expected global oil demand to rise by about 2.25 million barrels per day in 2024 and by about 1.85 million barrels per day in 2025. Both forecasts were unchanged from the previous month.

However, not all forecasts are in favor of better oil demand. The International Energy Agency (IEA) reduced its global oil demand growth forecast for this year for the second consecutive month, pressured by an economic slowdown and expectations for mild winter weather in Europe.

In its May report, the IEA stated that global oil demand would increase by 1.1 million barrels per day this year, which is about 140,000 barrels less than the previous month's forecast.

The report also noted that global oil supply is expected to rise by 580,000 barrels per day this year, reaching a record level of 102.7 million barrels per day, with production outside OPEC+ increasing by 1.4 million barrels per day.

Next year, the market is expected to be more balanced overall, according to the IEA's projections.

Even if OPEC+'s voluntary production cuts remain in place, global oil supplies could jump by 1.8 million barrels per day compared to this year's more modest annual increase of 580,000 barrels per day, the report added.

Interest Rate Cuts

Meanwhile, a stronger recovery of the global economy in the second half of this year, amid optimism that the US Federal Reserve might adopt a policy of interest rate cuts during its meeting in September is another factor that could be in favor of oil prices.

According to the CME Group’s FedWatch Tool, market confidence in the Federal Reserve cutting rates in September strengthened on July 5. The odds of a quarter-point cut rose to approximately 75%, up from 64% a week earlier. Also, expectations for two or more rate cuts by the end of this year rose to 71%, compared to 63% a week earlier.

Rising interest rates lead to higher borrowing costs for both individuals and corporates, thus reducing spending and shrinking demand for commodities. This results in lower corporate profits and postponed expansion plans, which threaten economies with recession, leading to a lower energy demand, particularly oil.

Global Economy Achieves Stable Growth

The World Bank (WB), in its latest Global Economic Prospects report, projected that the global economy will record stable growth for the first time in three years in 2024, though at weak levels by recent historical standards.

WB also forecast that global growth would remain steady at 2.6% in 2024 before rising to an average of 2.7% in the 2025-2026 period, significantly lower than the 3.1% average in the decade preceding the COVID-19 pandemic.

Global inflation is expected to ease to 3.5% in 2024 and to 2.9% in 2025, but at a slower pace than anticipated six months ago. Consequently, many central banks are expected to remain cautious about lowering their key interest rates.

According to WB, global interest rates are likely to remain high by the standards of recent decades, averaging about 4% during 2025 and 2026, which is nearly double the average in 2019 and 2020.

Ayhan Kose, Deputy Chief Economist at of World Bank Group and Director of Prospects Group, said that despite declining food and energy prices worldwide, core inflation is still relatively high and could stay that way. This may prompt major central banks in advanced economies to delay cutting interest rates.

Higher-for-longer interest rates will tighten global financial conditions and weaken growth rates in developing economies.

Geopolitical Conditions

The ongoing wars in Gaza and Ukraine continue to fuel geopolitical concerns. If these conflicts escalate, oil prices could see strong gains driven by supply shortage and supply chain fears.

Sources: Argaam, Reuters, Bloomberg, OPEC, IEA, WB