There Are Strong Headwinds Facing Oil's Bullish Price Consensus

It is widely believed that crude oil prices are on the rise, but the market hasn't yet jumped on the bandwagon.

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Nearly everyone in Houston this week pointed in the same direction when it came to oil prices: up.

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“In terms of fundamentals, we see that the market is tight, so the chances are higher that it will be higher than lower,” Shell Plc CEO Wael Sawan explained.

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“The world is in a pretty tight spot right now,” said Mike Wirth, a spokesman for Chevron Corporation. “During this second half of the year, we are beginning to see the upside risks accumulate as we progress through this year's second half."

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In their view, this is secondary to the sentiments of several analysts, traders, and executives: Demand, buoyed by the reopening of China's economy, will continue to rise to record levels as supply is constrained by OPEC+ policy, lackluster shale growth, and historically low investment.

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Despite this, the market doesn't seem to be willing to play ball - at least not yet. It is unfortunate that the prices have declined more than $4 since the start of CERAWeek on Monday, despite all the bullish forecasts. Moreover, benchmark Brent futures have averaged just under $84 a barrel this year, down from $88 a barrel in the last quarter of 2022 and 97 a barrel in the three months before that.

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Oil-market fundamentals are looking pretty good, but the prices are facing some headwinds at the moment. The supply of oil from Russia has remained stronger than many had expected. There is a growing trend of barrels that have been shunned by Europe making their way to markets in Asia.

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There is also a murky economic outlook to contend with. There is no doubt that Chinese demand today is robust, but a weaker-than-expected growth projection earlier this month rattled investors. The most important point here is that it is clear that central bankers have not yet been able to gain control over inflation.

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The bond market was adjusting to the fact that the Federal Reserve has become more aggressive as the energy world gathered in Texas this week. Global interest rates are unlikely to be on a clear downward trend by the second half of the year.

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A long-term trend of higher interest rates increases the risk of an economic slowdown and a decrease in oil demand due to a lack of demand. Although the bullish consensus is firmly based on solid fundamentals, it isn't a foregone conclusion.

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