Oil prices have given back almost all of the gains they made after OPEC and its allies surprised the market by agreeing to cut production by 1.2 million barrels a day starting in May. It’s a sign that the oil market is more focused on demand now, and doesn’t see enough evidence that countries are using more oil.
Weak demand is also weighing on oil stocks, which have had a mediocre month despite OPEC’s actions. The
SPDR S&P Oil & Gas Exploration & Production
ETF (ticker: XOP) is trading flat since before the announcement, and is down 0.8% so far this year even as the
S&P 500
has risen 8%.
Brent
crude, the international benchmark, fell 2.4% on Thursday, settling at $81.10 per barrel. That is 1.7% higher than the settlement price on the Friday before OPEC made its April 2 announcement.
West Texas Intermediate,
the U.S. benchmark, was down 2.4% to $77.29, which is 2.1% above preannouncement levels.
Both benchmarks had risen more than 6% on the day after the announcement. Several analysts boosted their medium-term forecasts for oil prices afterward.
The biggest reason for the price decline is that demand has remained relatively weak. “Pessimism about global GDP growth and supply/demand balances—including in China—appears to be growing,” wrote Citi analyst Francesco Martoccia.
In general, oil is building up in storage around the world, with the exception of the U.S.
Now, some analysts are decreasing their price estimates. Roth Capital Partners analyst Leo Mariani reduced his 2023 WTI price estimate by 7% to $84, citing “a slow start to the year.” He lowered his 2024 forecast to $90 given concern about an economic slowdown early in 2024.
That said, most analysts, including Mariani, project that demand will rise more in the second half of the year, when the Chinese economy is fully back to normal after the lifting of the strict lockdowns the government had used to fight Covid-19.
But so far, Wall Street has mostly overestimated demand. Investors will likely wait for more evidence before believing in that second-half comeback.
Write to Avi Salzman at avi.salzman@barrons.com
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