Dire Predictions For Oil Market, Fed Letdown, Cap Price Gains

Citi thinks Brent could dip to $60 by next year: File Image/Pixabay

Interest rate cuts in December instead of sooner capped modest gains for oil on Wednesday, which were initially spurred by ongoing tensions in the Middle East.

Brent settled up 68 cents at $82.60 per barrel, while West Texas Intermediate settled up 60 cents at $78.50 on the strength of Hamas proposing unworkable changes to a U.S.-backed proposal for a ceasefire with Israel, according to Washington – suggesting that hostilities would continue for the foreseeable future.

However, sentiment turned outright bearish when the U.S. Federal Reserve at the end of a two day meeting projected only a single quarter-percentage-point reduction in rates for the year, with minuscule cuts not beginning until December.

Consumer price data published Wednesday, had reinforced expectations of a September cut.

The mood wasn't helped by the Energy Information Administration, which on Wednesday disclosed a surprise crude inventory build last week, up by 3.7 million barrels to 459.7 million barrels, compared with expectations of a 1 million barrel-draw.

Additionally, gasoline stocks rose by 2.6 million barrels to 233.5 million barrels compared with expectations for a 900,000-barrel increase.

More bad news contributed to Wednesday's gloom via the International Energy Agency, which in its latest report stated that the world's total oil supply capacity is expected to rise to about 114 million barrels per day (bpd) by 2030, 8 million bpd above projected demand.

However, the EIA based its projections on expectations of a continuing shift to electric vehicles in the U.S. and other developed nations: the agency thinks global EV sales could reach 40 million cars in 2030.

Patrick De Haan, head of petroleum analysis at GasBuddy, said, "It's a long-range outlook, so it could be way off, or very close, but I'm a bit more concerned with the slowdown in EV adoption and the tremendous costs for countries adopting EVs."

Similar to the EIA's outlook, Citi analysts anticipate a decline to $60 per barrel for Brent by 2025, a decrease of over 20 percent compared to current market expectations; their view was based on expectations for a global market surplus, and they advised oil producers to hedge against potential price drops and for investors to capitalize on short-term price increases by taking bearish positions.