As we progress through the remainder of 2024, oil prices are projected to climb to around $85-$87 per barrel, driven by a combination of geopolitical concerns, ongoing supply reductions, and the anticipated announcement of two rate cuts by the US Federal Reserve, according to the latest report from brokerage house Motilal Oswal. The report highlighted that the situation in China will be a critical factor to watch, as it could either dampen the upward momentum in the oil market or, in the case of a recovery, provide additional positive sentiment.

Crude Oil Market Dynamics

Motilal Oswal's report delves into the intricate factors influencing the crude oil market, which has seen prices fluctuate within a volatile range of $75 to $85 per barrel. The market's uncertainty stems from a blend of geopolitical events, OPEC+ decisions, election dynamics in the U.S., and inconsistent demand from China.

During the first quarter of 2024, discussions within OPEC+ and geopolitical risks, coupled with positive economic indicators from the U.S. and India, initially drove prices higher. However, these gains were limited by concerns over China's economic growth, the U.S. Federal Reserve's monetary policy, and the strengthening U.S. dollar. This mix of influences has created a delicate balance, making it challenging to predict the price trajectory with certainty, warned the brokerage.

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Meanwhile, in the second quarter of 2024, OPEC+ announced plans to gradually reverse the 2.2 million barrels per day (Mbpd) of voluntary production cutbacks. While this decision initially sparked optimism in the market, the potential for increased global oil stockpiles quickly introduced caution. Furthermore, China's muted oil imports during this period dampened the bullish sentiment, as ongoing economic uncertainties in the country played a significant role in tempering market expectations. As a result, the anticipated boost from OPEC+'s policy shift was counterbalanced by these persistent concerns, leading to a cautious market outlook, observed MOSL.

Geopolitical Risk Premium

Geopolitical risks have been a significant factor driving oil prices higher in recent months. The Motilal Oswal report highlighted that the escalating tensions in the Middle East, particularly the rise in Houthi attacks on merchant ships in the Red Sea, have heightened concerns about the security of key shipping routes. These incidents have added to the instability in the region, making the market more sensitive to potential disruptions in oil supply.

Further exacerbating the situation are the rising tensions following the deaths of a radical Islamic Hamas leader and a high-ranking commander of Hezbollah near Beirut and Tehran, noted MOSL. These events, likely the result of Israeli reprisals, have intensified the already volatile situation in the Middle East. Iran, Hezbollah, and Hamas have all announced their intent to retaliate, with growing expectations of an imminent attack on Israel by Iran. This looming threat is expected to keep the market on high alert, further inflating the geopolitical risk premium in the oil market, cautioned the brokerage.

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As a result, the geopolitical risk premium in the oil market is expected to remain elevated, potentially adding $2–$3 per barrel each month, forecasted the brokerage.

"If the violence escalates and disrupts oil supply from the region, this premium could persist or even increase, providing continued support to oil prices. The possibility of supply interruptions introduces significant uncertainty, making the market especially sensitive to developments in the Middle East," it said.

Oil Demand Outlook

The report also touches on the global oil demand, noting a continued decline in the second quarter of 2024, with year-over-year growth slowing to 710,000 barrels per day (kb/d), the lowest level of quarterly growth since the fourth quarter of 2022. This slowdown has been particularly influenced by reduced Chinese consumption as the nation’s post-pandemic recovery has lost momentum.

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Looking ahead, global oil consumption is expected to grow by slightly less than 1 Mbpd in both 2024 and 2025. This modest growth is attributed to several headwinds, including sluggish economic growth, increased efficiency, and the ongoing electrification of vehicles. Despite these challenges, transport fuel demand is expected to remain robust due to strong road and air mobility, supported by the continued recovery in travel and transportation activities.

Additionally, upcoming heavy refinery maintenance scheduled for the autumn, coupled with potential weather-related disruptions from the hurricane and monsoon seasons, could limit product output. These factors are likely to tighten supply and strengthen product markets, particularly in September. The combination of steady demand and constrained supply is expected to lead to firmer prices in the product markets during this period, according to Motilal Oswal.

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In conclusion, the outlook for oil prices in 2024 remains cautiously optimistic, with several factors contributing to the anticipated rise to $85-$87 per barrel. Geopolitical tensions, particularly in the Middle East, are expected to play a significant role in driving prices higher, while ongoing supply concerns and the potential for rate cuts by the US Federal Reserve add to the complexity of the market dynamics. However, the situation in China remains a critical wildcard, capable of either supporting or dampening the upward momentum in the oil market. As the year progresses, market participants will need to closely monitor these developments to navigate the volatile landscape effectively.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.