Crude Oil Q1 Fundamental Forecast: US Rate Cut Hopes Offer Support Amid Demand Worries

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Supply Cuts Vs Shaky Data

Oil prices hit their highest level of 2023 in September but have declined very sharply since. The United States West Texas Intermediate benchmark topped out at $94.99/barrel on September 28 as major producers Saudi Arabia and Russia both opted to extend production cuts. However, crude prices have shed more than $20 from those peaks, despite the prospect of ongoing production curbs by the Organization of the Petroleum Exporting Countries and its allies- known as the OPEC Plus group.

Shaky economic data kept the market fretting about likely end-demand for energy from some of the largest importers, with China in particular focus. Indeed. news that production cuts would be extended into the New Year wasn’t enough to keep prices from falling further in November. Moreover, the large, developed economies are still struggling with the burden of interest rates at highs not seen for a generation, with the lagged effects of these perhaps still to be felt in many cases.

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Crude Bulls Hope For Increased US Demand, IEA Thinks They’ll Get It

The struggle between major producers’ desire to support prices and fundamental worries about global demand is of course not going to end simply because the calendar has flipped over to a new year.

But there are some bullish glimmers in sight for a market that’s clearly been under pressure for months. Indeed, the International Energy Agency has just increased its own forecast for crude demand in 2024. It’s looking for an increase of 1.1 million barrels per day, up 130,000 barrels from its previous forecast, citing an improvement in US appetite for oil.

Based on the most recent commentary from the Federal Reserve, financial markets now dare to hope that interest rate cuts may come as soon as March. This prospect alone has given crude a modest lift simply by weakening the Dollar and making oil products priced in it more attractive.

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The Fed May Cut Rates. Will Anyone Else?

Still, even if the US has defeated inflation, it’s far from clear that other major economies are as comfortable. The Eurozone and United Kingdom still look set for extended periods of higher borrowing costs as they attempt to wrestle prices lower, with the monetary view ahead not less certain and possibly more diverse than it has been for a long time.

Perhaps most worryingly of all for energy markets China remains mired in a deflationary slowdown, with Beijing seemingly unwilling or unable to unleash the sort of massive stimulus markets would like to see.

So, while there’s some cautious monetary optimism heading into 2024, there are clearly some major headwinds for the oil markets too. It’s also possible that investors are getting ahead of themselves with those US rate-cut bets. Inflation can be very hard to kill, and prone to resurgence even when it seems to be fading out.

Crude may not slide below its most recent lows in the coming three months, but it’s not likely to revisit those 2023 highs either.