"Brent crude prices are climbing as tensions escalate in the Middle East and meaningful progress in ceasefire negotiations seem unlikely.
Increasing instability in the region, ongoing supply outages in Libya and a warming macroeconomic sentiment mean the recent slump in crude prices is over, at least momentarily.
Examining the fundamentals, Brent prices should gradually move into the upper $80s per barrel in the coming weeks, perhaps even hitting $90 if the bullish sentiment intensifies."
Brent crude futures surged above $80 per barrel on Monday, 26 August, marking a third consecutive day of gains.
This rally was driven by escalating supply risks amid fears of a broader conflict in the Middle East following significant missile and drone exchanges between Israel and Hezbollah, in addition to production cuts in Libya.
Expectations of a more accommodative US monetary policy, spurred by Federal Reserve Chair Jerome Powell’s hints at a potential rate cut, further bolstered market sentiment.
Even so, persistent concerns about slowing Chinese demand and ongoing ceasefire negotiations in Gaza linger.
Negotiators in Cairo have made some progress toward a ceasefire in Gaza, but significant challenges remain, particularly around Hamas’ demands for a full Israeli withdrawal and a permanent resolution.
The talks are focused on details like prisoner exchanges and Israel's military presence in Gaza's Philadelphi corridor.
Despite some progress, the situation remains unsolved with ongoing violence, including the latest escalation between Israel and Hezbollah.
While a ceasefire plan includes substantial humanitarian aid and reconstruction, broader regional tensions continue to impact oil prices.
Iran, despite promises of a response to the killing of a key Hamas leader in Tehran, has yet to take any action.
In Libya, the eastern government, opposed to the Tripoli-based administration, declared a shutdown of all crude oil production and exports on Monday, escalating the conflict over the control of its Central Bank and oil revenues.
This ‘force majeure’ declaration affects all oilfields, facilities and export terminals.
While the eastern government, led by military leader Khalifa Haftar, controls most of Libya’s oilfields, the National Oil Corporation (NOC) has yet to confirm the halt.
The power struggle over the leadership of the Central Bank of Libya, with Tripoli attempting to replace Governor Sadiq Al-Kabir, threatens to further reduce Libya’s oil output amid escalating east-west political tensions.
In the US, expectations of interest rate cuts later this year strengthened further, with a likely 25 basis-point reduction in September.
Key inflation reports due on 30 August and 11 September will be the key drivers; signs of further economic weakness may bolster market hopes of a larger rate cut.
On fundamentals, Rystad Energy’s latest update forecasts global crude oil and condensate production to reach 82.89 million barrels per day (bpd) in the second half of 2024, an upward revision of 270,000 bpd compared to our previous outlook.
This increase is driven by higher output from non-compliant OPEC+ members like Iraq, the UAE, Kazakhstan and Russia, who have consistently exceeded their production quotas.
While OPEC+ showed improved compliance with cuts in July in comparison with the previous month, is it still producing 156,000 bpd above the target of 33.85 million bpd, though Russia alone still exceeded its quota by 110,000 bpd.
The US outlook remains steady with a 350,000-bpd year-on-year growth, buoyed by gains in the Delaware Basin and Eagle Ford shale.
Production forecasts for South America, particularly Brazil and Guyana, however, have been downgraded due to slower ramp-ups and maintenance.
Libya faces significant downside risks due to political instability and infrastructure damage, which could further diminish its output.
On the demand side, Rystad Energy forecasts a rebound in China’s crude runs for August, following a 21-month low in July, driven by better margins from lower feedstock costs.
Teapot refineries are recovering as crude prices soften, while state-owned refineries maintain stable utilization.
Diesel exports are expected to decline in the short term due to narrowing price spreads between Singapore and China.
The government is expected to issue the third batch of export quotas in September, while also weighing the need to reduce carbon emissions.
China's economy remains sluggish, with measured government support to mitigate the slowdown.
According to Rystad Energy's outlook for the short-term, which reflects market supply and demand fundamentals, both crude and total liquids balances are expected to tighten between now and December.
Consequently, Brent prices are projected to gradually rise toward the upper $80s per barrel, with a steepening backwardation.
Brent ‘fair value’ in September, i.e. the price that corresponds to the forecast inventory levels in September, is $83 per barrel, rising to $85 per barrel in October.
Yet, it is worth remembering that oil market balances are heavily dependent on OPEC+ compliance.
Despite tight balances, the bearish demand sentiment and ongoing ceasefire discussions in the Middle East suggest that OPEC+ may struggle to unwind its voluntary production cuts as early as October.
This week’s macroeconomic updates will center on US performance, with gross domestic product (GDP) expected to grow by 2.8% quarter on quarter, up from 1.4% in 1Q, and inflation projected to hold steady at 2.5%.
US crude inventories are expected to continue to draw.
Against this backdrop, prices are likely to remain supported.
In the coming weeks, Brent crude prices will remain sensitive to the main factors that have dominated the price formation in the past few weeks – they are, developments in the Middle East, shifts in Chinese demand and US macroeconomic updates.
