Economic and Inventory Insights
The week started on a bearish note with tensions easing in the Middle East and US GDP data revealing tepid growth of 1.6%, significantly lower than the 2.4% expected. This underperformance has sparked concerns about a possible economic slowdown, casting a shadow over future oil demand. Bearish sentiment was further fueled by the strength of the U.S. dollar, which made dollar-denominated oil more expensive for holders of other currencies, potentially dampening demand.
However, market sentiment changed with the release of the latest report from the Energy Information Administration (EIA), which showed an unexpected drop in US crude inventories of 6.4 million barrels, compared to an expected increase of 825,000 barrels. This significant decline is a bullish signal, often indicative of higher-than-expected demand or lower supply, and has provided substantial support for oil prices amid broader economic concerns.
Geopolitical tensions
Although the risk premium was affected at the start of the week by the idea of easing tensions between Hamas and Israel, geopolitical risks actually intensified throughout the week with the intensification of military actions in Middle East, particularly Israeli airstrikes in Gaza. Such conflicts typically introduce a risk premium on oil prices due to possible supply disruptions.
Currency impact and Fed policy
The US dollar rose to a 34-year high against the yen, supported by US PCE inflation data released last week, which showed an increase to 2.7% year-on-year. This dollar strength is a double-edged sword, as it can limit oil price gains by making the product more expensive in other currencies. Additionally, high inflation rates have dashed hopes that the Federal Reserve might soon cut interest rates, maintaining economic pressure.
Market Forecast
The outlook for the coming week on oil markets appears cautiously optimistic but remains complex. Positive economic remarks from US Treasury Secretary Janet Yellen, suggesting possible upward revisions to GDP figures, could boost market confidence.
Additionally, the significant inventory reduction indicates robust demand, supporting a bullish stance. However, traders should weigh these positive indicators against continued high inflation and a strong dollar, which could limit gains. Mixed sentiment among fund managers and lingering geopolitical risks could inject volatility into markets.
