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Oil Poised for Good Week as US Debt-Deal Boosts Market Sentiment

Oil prices are set to have their best week since mid-April due to optimism surrounding a potential US debt deal. House Speaker Kevin McCarthy has indicated that a preliminary agreement may be reached over the weekend. West Texas Intermediate (WTI) futures are trading above $72 per barrel and have risen by 3% this week.

Energy experts had recently been more pessimistic about the future of oil prices compared to their previous forecasts. Various agencies, including the International Energy Agency (IEA) and OPEC Secretariat, have predicted oil demand growth in 2023. While all agencies expect an increase compared to 2022, their outlooks are less optimistic than before.

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WTI hit yearly lows, where next?

The IEA and OPEC Secretariat were previously more bullish, expecting demand to grow by 2.0-2.3 million barrels per day. On the other hand, Standard Chartered and the US-based Energy Information Administration (EIA) were less optimistic, projecting growth of 1.3-1.4 million barrels per day. However, these economists have now become more optimistic, despite the overall market sentiment leaning towards bearishness.

According to recent reports, there is a divergence between the views of energy economists and speculative traders. Oil prices have experienced significant declines in the past couple of months, with short sellers gaining momentum in the market. The collapse of Silicon Valley Bank in March led to a rush of capital out of oil and into precious metals, triggering a surge in speculative short positions.

While oil inventories have fallen below the five-year average this year, large draws from inventories have not been able to prevent significant price drops. This is due to concerns about weakening economic conditions, a hawkish Federal Reserve, and reports of strong Russian crude shipments despite sanctions.

Despite the growing bearishness in the oil market, the International Energy Agency predicts that global oil consumption will rise to a record high in 2023. They expect inventories to tighten further as OPEC+ implements production cuts. The surplus in global oil markets is expected to be eliminated if the cuts are maintained throughout the year.

In addition, natural gas prices are expected to increase in the latter half of the year as Europe faces a shortage of long-term contracts and relies more on spot markets. This could lead to higher prices.

Meanwhile, oil prices are experiencing a weekly increase due to optimism surrounding the avoidance of a US debt default. House Speaker Kevin McCarthy has expressed hope for an agreement, and Asian refiners' crude buying has also contributed to bullish sentiment. However, the overall outlook for oil remains affected by factors such as China's economic recovery and Federal Reserve policies.

Wildfires in Alberta, Canada, have disrupted oil production in the region, adding some tightness to the market. Despite these challenges, oil prices are showing signs of support due to the broader risk environment, debt ceiling talks, the US summer driving season, and the nation's plan to replenish its strategic reserves.

Currently, WTI futures for June delivery are trading at $72.12 per barrel, while Brent for July settlement is also seeing gains.

Broker note: Question often asked, What's the difference between the WTI Oil price and Brent Oil?

The main difference between WTI (West Texas Intermediate) and Brent crude oil prices lies in their geographical location and the quality of the oil they represent.

WTI is primarily produced in the United States, specifically in Texas. It is a lighter and sweeter crude oil, meaning it has a lower density and sulphur content. WTI is often used as a benchmark for oil prices in North America.

On the other hand, Brent crude oil is extracted from oil fields located in the North Sea, off the coast of Europe. It is also a light and sweet crude oil, but it typically contains slightly higher levels of sulphur compared to WTI. Brent is widely used as a global benchmark for oil prices.

The difference in location and quality influences the supply and demand dynamics for each type of crude oil. Factors such as transportation costs, refining capacity, and geopolitical events can also contribute to price differentials between WTI and Brent.

It's important to note that while WTI and Brent are the most well-known and commonly referenced crude oil benchmarks, there are other regional and crude oil blends around the world, each with its own characteristics and pricing dynamics.


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