Oil market nears breakout point

Oil prices have been tightly range-bound for about a year now, with bearish and bullish factors largely balancing each other out. But one Wall Street major believes the market is nearing a breakout point. The only question is whether the breakout will be a bearish or a bullish one.

In a recent note, Bank of America analysts referred to the current situation in crude oil as a Bermuda Triangle because of the region’s notoriety as a sort of black hole where vessels and aircraft disappear without a trace. In the case of oil, the disappearance could be that of demand worries about China or expectations of extended production cuts by OPEC+, Investing.com wrote.

The BofA analysis is based on technical indicators that suggest oil has been experiencing growing pressure, likening the past year or so in oil trade to a tightly wound spring. Sooner or later, the spring would be released, and per BofA, that moment is near.

Speaking practically rather than technically, the chances of OPEC+ rolling back their production cuts are not exactly great. The group has repeatedly made it clear that it would only do that if prices move much higher than they are now. Right now, prices are sinking because the war premium from the Middle East conflict is shrinking while the bearish demand attitude about China is getting reinforced by economic data. Earlier today, Brent crude sank below $80 per barrel.

Bank of America’s analysts seem to be leaning towards a bearish breakout, by the way. In fact, they expect oil prices to dive all the way to the $60s by the end of the year, meaning that negative expectations would trump any positive developments. This suggests that the focus on China will likely remain strong, with other fundamental factors taking the backseat, such as the state of world oil reserves.

Rystad Energy recently reported that the world’s recoverable reserves were lower than official reports showed, which should have sounded a bullish note for oil but did not because of the more abstract nature of total reserves as opposed to everyday output and demand trends. The energy research outlet calculated the total at 1.5 trillion barrels, which was down by some 52 billion barrels from last year’s calculations. Rystad attributed the decline to a year’s worth of production since 2023 and downward adjustments of resources.

Based on that total, Rystad forecast that oil production could peak at around $120 million barrels daily in 2035 and then decline to 85 million barrels daily by 2050. Yet that was in a “high case” scenario seeking oil demand as strong as it is now—which is not the scenario Rystad itself likes best. The company would much prefer a scenario where the electrification of transport reduces oil demand—because the available reserves are insufficient to support much higher demand.

Yet all these are long-term predictions, and these are notoriously inaccurate. In the short term, oil prices will most likely remain stuck between the rock of Chinese demand—meaning Chinese economic indicators—and the hard place of the Middle Eastern conflict. The sideshow is OPEC and its production cuts, which are probably safe to say are going nowhere until Brent crude moves closer to $90 or even tops it.

Indeed, Bank of America analysts have also allowed for such a development, saying that if Brent can top $89 per barrel, it could go to $105 per barrel by the end of the year. That would probably take a major escalation in the Middle East or a slump in U.S. shale output.— Oil Price