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As the tensions in the Middle East continued to escalate in early April, driven by the war premium, crude oil prices soared to over $90 per barrel. However, with the situation easing, the geopolitical risk premium on oil has dissipated, causing Brent crude to plummet by $10 in a month to around $80, currently hovering at around two-month lows.
The focus now shifts to the production cut resolution of OPEC+ and the interest rate path of the Federal Reserve.
Regarding the disappearance of the war premium on oil, Eric Nuttall, a partner at Ninepoint Partners, expressed on Tuesday that this is actually a positive development for investors. He believes that compared to global crude inventories, the current oil prices no longer carry a risk premium. Despite this, Nuttall remains bullish on oil prices and the energy sector, not due to the deterioration of the Middle East or Eastern European situations disrupting crude supply, but rather the resurgence of seasonal demand.
According to his forecast, crude inventories will reach historically low levels by the end of this year, providing strong support for oil prices in the range of $85-90.
In early April, as tensions simmered between Israel and Iran, traders flooded into the crude oil options market, betting on the Brent crude price rising to $100 in the coming months. Bullish call option trading volumes for $100 and $110 options hit record highs. At the same time, many investment banks revised their short-term oil price forecasts upward, with the most optimistic even predicting oil prices to soar to $100 this summer.
However, by the end of April, as Israel and Iran chose to de-escalate the situation, hedge funds and other asset management companies began unwinding their long positions.
OPEC+ will hold a meeting in June, and the Federal Reserve will convene for its interest rate meeting on June 12. Both of these meetings will have a significant impact on global oil supply and demand.
Last week, a majority of traders surveyed by Bloomberg expected OPEC+ to extend the production cut deadline until the second half of this year. If oil prices do not rebound again and approach $90 by June 1, this possibility becomes even more likely. However, the signals released by representatives of various member countries are currently mixed. For instance, Alexander Novak, the Russian Energy Minister, stated last Friday that Russia could increase production by more than 200,000 barrels per day if necessary to help OPEC and non-OPEC oil-producing countries achieve a production increase of 1 million barrels per day.
In addition to OPEC, the interest rate decision by the Federal Reserve is also under scrutiny. The market generally expects the Federal Reserve to maintain the current interest rate levels in the next meeting, with the CME Group’s FedWatch Tool showing only an 8.7% probability of a rate cut. Higher for longer interest rates are unfavorable for the growth of oil demand.
