Oil prices have been on a downward trend recently, and this decline is largely attributed to concerns over interest rate forecasts. On Monday, Brent crude futures fell by 0.5 percent to $81.23 a barrel, while U.S. West Texas Intermediate crude futures (WTI) were down 0.4 percent at $76.15. These losses come after a week of decline, with Brent losing around 2 percent and WTI falling over 3 percent.
The main factor affecting oil prices currently is the anticipation that higher-than-expected inflation could delay cuts to high interest rates. The market sentiment is focused on the expectation that interest rates will remain high for longer, which has led to the strengthening of the U.S. dollar and put pressure on commodity prices, including oil. A stronger dollar makes oil more expensive for buyers using other currencies.
Oil prices have been trading within a range of $70 to $90 a barrel since November, despite ongoing conflicts in Ukraine and Gaza. This stability is mainly due to the increase in U.S. oil supply and concerns over weak Chinese demand, which have offset the impact of OPEC+ supply cuts.
In terms of geopolitical risks, the recent attacks by Yemeni Houthis on ships in the Red Sea have had a limited impact on the Brent crude price. Analysts from Goldman Sachs estimate that the geopolitical risk premium on Brent crude is only $2 a barrel. However, disruptions in the Red Sea have resulted in larger than expected draws in oil stocks held by developed countries. As a result, Goldman Sachs has raised its summer peak price projection to $87 a barrel, up from $85.
Despite these concerns, Goldman Sachs still expects oil demand to grow by 1.5 million barrels per day (bpd) in 2024. However, they have adjusted their forecast for China while raising projections for the United States and India.
Overall, the decline in oil prices is primarily driven by concerns over interest rate forecasts and the impact of a stronger U.S. dollar. While geopolitical risks have had a limited effect on oil prices so far, disruptions in the Red Sea have led to larger than expected draws in oil stocks. Despite these challenges, the long-term outlook for oil demand remains positive, with expectations for growth in the United States and India.
