Crude oil forecast: Geopolitical tensions drive brent towards $95 per barrel in near term

Over the last one-month, global crude oil prices rose sharply, with brent crude futures surpassing the $87 per barrel mark for the first time since October 2023. This uptick is attributed to various factors, including the tightening of physical markets, the decision by OPEC+ members to prolong production cuts, increased demand from major oil consumers worldwide, and escalating geopolitical tensions.

The tightening of physical markets in February followed a seasonal trend, but the key driver was OPEC+ members' move to extend production cuts from March 2024 to June 2024, with indications suggesting a potential extension for the rest of the year. ICICI Bank Global Markets highlighted in its latest report that this decision implied sustained tightness in physical markets due to limited supply throughout Q2 2024.

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Moreover, the recent surge in geopolitical tensions has further propelled oil prices upward. Notably, Ukraine's launch of drone attacks on Russian oil refineries, including Lukoil Nizhny, Rosneft Ryazan, and Surgut Kirishi, has caused partial shutdowns. Ukrainian officials have stated their intention to disrupt Russia's revenue-generating oil industry and domestic fuel supplies through these attacks.

Additionally, Houthi militants in Yemen continue to target shipping vessels in the Red Sea, despite airstrikes from the US that have resulted in an increase in concerns over more disruptions to supplies from the region. However, so far, the hit to actual supply from developments in the Middle East has not taken place, which is in turn limiting the degree of upside in brent crude oil prices.

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Pickup in Demand

With the exception of the US economy, demand rose across countries, driven by increased mobility in China on the occasion of the Lunar New Year and in Europe. It says that the demand from India also increased as household consumption remained robust amid cooler weather in the north, while diesel consumption increased in line with the receding winter and increasing mobility. 

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On a sequential basis, it pointed out that global supply remained steady, with total production reaching 101.8 million barrels per day (mbpd). OPEC adhered to its guidance, and non-OPEC production followed a similar trajectory as observed in the previous month. Overall, the surge in demand led to a net supply deficit in the physical markets, amounting to 1.1 mbpd in February 2024, it added. 

EMs to drive the demand higher 

ICICI Bank Global Market's global demand-side projections for crude oil remain consistent with previous estimates, indicating expectations of a global soft landing. It anticipates a modest uptick in demand by 1.1 mbpd in 2024, a decrease from the 1.9 mbpd growth observed in 2023. This projection aligns with subdued global growth forecasts for 2024, anticipated at 2.8% year-on-year, down from the earlier expectation of 3.0%.

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It maintains its outlook for EMs to spearhead demand growth, with India and China leading the way. Meanwhile, it predicts a slight increase in US demand, while European demand is projected to remain stagnant. Looking ahead to 2025, it expects incremental demand to rise further by 1.2 mbpd compared to the previous year, reaching an average of 103.3 mbpd.

Global crude prices outlook

According to ICICI Bank Global Markets, the outlook for the oil market remains broadly balanced throughout 2024 and 2025. However, in the near term, the continuation of geopolitical tensions may lead to a potential increase in prices.

The brokerage suggests the possibility of brent crude futures rising from $90 per barrel to $95 per barrel in the short term and it expands its previous range of $75 per barrel to $85 per barrel in Q2 2024 to $80 per barrel to $90 per barrel to take into account the geo-political uncertainty premium that could persist. 

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Nevertheless, ICICI Bank Global Markets anticipates that a reduction in geopolitical tensions could prompt brent crude prices to retreat to the range of $75 per barrel to $85 per barrel in the latter half of 2024. Consequently, the average brent crude price forecast has been revised upward from $80 per barrel to $83 per barrel for Q2 2024.

Looking ahead to 2025, the brokerage foresees a relatively stable physical market, maintaining a flat trading profile of $75 per barrel to $85 per barrel. "There remain upside risks to our projections given the prospect of lower supply levels than we assumed," said ICICI Bank Global Markets.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.