Crude prices may stay capped on lower global demand despite supply challenges, geopolitical tensions: Energy experts

Strong US dollar has also built pressure on crude prices.

Crude oil prices in the short term would be driven by lower-than-expected global demand and weak economic growth around the world, offsetting the impact of geopolitical tensions, according to energy experts.

The year 2024 started with international oil prices being under pressure due to high crude inventory in the US and weak demand in China, the largest energy consumer in the world. On January 18, Brent was trading around $78 per barrel, compared to prices hovering around $90 per barrel in September last year.

“China’s demand has not panned out as it was expected and demand, in general, has also been low due to higher interest rates and inflation. Plus, the US inventory (of crude) is healthy and the US crude production is healthy as well. These factors have impacted crude prices,” said Prashant Vasisht, VP & Co-Head, Corporate Ratings, ICRA.

Strong dollar

Despite disruptions in the Red Sea, which accounts for 10 percent of the world's oil, grain, and consumer goods shipments, crude prices have remained low. Meanwhile, the strong US dollar has also built pressure on crude prices. The US dollar hit a one-month high on January 17 after the US Federal Reserve officials refuted expectations of aggressive interest rate cuts.

“The dollar strength also pulled down crude oil prices as the US Fed officials lowered expectations for aggressive interest rate cuts, pushing the dollar to a month’s high level. The geopolitical risk surrounding the Red Sea is somewhat being downplayed by investors over rate cut worries, but we continue to remain bullish on crude oil in the short term. Crude oil prices should have a limited downside in the short term with support around $69, while it could rally to face the resistance of $75,” said Mohammed Imran, Research Analyst at Sharekhan in a note.

Growth concerns

Experts believe that pressure will continue to remain on international crude prices as the global growth outlook does not seem strong. Supply cuts from the Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, have failed to support crude prices for a sustained amount of time on account of weak demand and high US production.

“Global growth is expected to remain weak in 2024, especially in the first half, as the impact of higher interest rates would be realised in the period. Weak growth of developed economies and lower China demand would overall result in weak oil demand globally despite supply challenges. Currently, it is difficult to visualise crude oil prices going towards $85 or $90 per barrel,” said Suman Chowdhury, Chief Economist and Head of Research, Acuite Ratings and Research.

In December, OPEC+ voluntarily agreed to cut output by nearly 1 million barrels per day (bpd) by early 2024, taking the total cut in production above 2.2 million bpd, or about 2 percent of the world supply, to support crude prices.

Even as Saudi Arabia and Russia have taken the lead in implementing supply cuts, many other countries have increased their output.