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Supply and Demand Dynamics

Despite the upswing, both U.S. crude benchmarks ended the week over 1% lower, marking their fourth consecutive weekly drop. A rise in U.S. crude inventories and sustained high production levels were key contributors to this downtrend. Additionally, China’s intensifying property crisis and slower industrial growth exerted downward pressure, with demand growth from the Asian giant falling short of projections.

U.S. Production Shifts

In response to these weaker prices, U.S. oil producers have reduced active drilling rigs for almost a year. However, a recent count indicated a notable increase in rigs, the most significant since February, suggesting a recalibration of production strategies in light of fluctuating prices.

Geopolitical Tensions and OPEC+ Outlook

Geopolitical tensions in the Middle East, which pose risks to oil supply, are juxtaposed with the U.S.’s firm stance on enforcing sanctions against Iran. Analysts speculate that if Brent crude remains below $80, OPEC+, primarily Saudi Arabia and Russia, may extend output cuts into 2024. This anticipation coincides with the OPEC+ group’s upcoming meeting to deliberate on additional supply cuts.

Market Forecast

Despite demand outperforming optimistic expectations, the strength of non-core OPEC supply has somewhat mitigated the impact of OPEC cuts. The U.S., contributing significantly to non-OPEC+ growth, is expected to see a surge in production. Conversely, inflation in the Eurozone is showing signs of easing, a factor that could influence future oil demand and prices.

Short-Term Outlook

The current market scenario suggests a bearish outlook in the short term. The transition to a contango market structure, where future delivery prices outstrip spot prices, hints at an anticipated oversupply. However, it may be ripe for a technical rebound because it is currently testing a value area.

This shift, combined with the latest EIA report highlighting increased U.S. crude stockpiles but reduced gasoline and distillate inventories, paints a complex picture of supply and demand dynamics.

The market remains sensitive to a range of factors, including geopolitical developments, OPEC+ decisions, and global economic indicators, particularly from China and the Eurozone.

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