Oil prices initially pushed higher yesterday amid robust signs of demand in Asia. India’s June crude oil imports surged nearly 21% from a year earlier. A further fillip for upside potential was the spectre of supply shortages stemming from Russian limits on European gas shipments. In response, EU member states agreed to cut their gas use by 15% from August to March in an attempt to avoid an energy crisis generated by further Russian cuts to supply. It must, however, be said that this target is unlikely to be reached with several EU nations having negotiated exemptions or softer rules.

Alas, the feel-good factor did not last as the IMF poured cold water on any lingering economic optimism with a substantial downward revision to its growth forecasts. The Washington-based lender cut its world GDP projection for this year to 3.2%, down from 3.6% previously, and to just 2.9% in 2023, down from 3.6%. It also gave a stark warning that economic prospects could worsen still given the hosts of downside risks.

Meanwhile, on a similarly downbeat tone, the Conference Board’s gauge of US consumer confidence fell for the third month running to a near 18-month low. Staying in the US, buyers were also spooked by the latest SPR announcement. The Biden administration announced the sale of an additional 20 million bbls of SPR crude oil as part of a previous plan to tame rising oil prices.

Nevertheless, the energy complex is regaining some ground at the time of writing amid hints of dwindling US oil stocks. API data released overnight showed crude stocks fell by 4 million bbls last week. Products followed suit with gasoline and distillate fuels inventories declining by 1.1 million bbls and 554,000 bbls, respectively. Coupled with the Fed decision on interest rates, today is sure to be a heavy US-centric session.

Will you rally me?

Volatility has become a permanent fixture of oil markets. This makes it increasingly difficult to forecast what prices will do in the short-term. That being said, the crash in oil prices that got underway in the middle of June looks to be over. Bulls are showing signs of life. Last week, Brent notched its first weekly gain in six, and has made a positive start to this week. Will there be a continuation of the bullish bias in the upcoming sessions? We’ll have a better idea once two potential market-moving catalysts are safely navigated.

The first is today’s policy-setting meeting by the Federal Reserve. The US central bank is widely expected to raise interest rates by another 75 basis points following June’s hike. Policymakers initially floated the idea of a full percentage point. However, the cooling oil price rally has persuaded the Fed to go easy on its aggressive rate hike regime. What’s more, markets have now become accustomed to interest rate hikes with the world’s major central banks all kicking off their monetary policy tightening cycles. The upshot is that today’s Fed interest rate rise shouldn’t knock oil prices as it did previously.

The second hurdle to overcome is next week’s OPEC+ meeting. The producer alliance will decide whether there will be an increase in supply or the continuation of the current situation in September and potentially onwards. Simply put, the crunch meeting will go a long way to setting the price tone for the remainder of 2022. Western leaders are hopeful that the group will boost their output from September, though they will likely be left disappointed. At the crux of the matter is spare capacity, or better said, the lack of it. As the group’s purveyors of emergency supply, combined Saudi Arabia-UAE spare capacity is poised to drop to a meagre 2.2 mbpd once cuts are fully unwound. Any attempt at utilising this could spark panic and send prices scrambling higher. Small wonder, then, why the two OPEC heavyweights are reluctant to fully tap their spare capacity. At the same time, the Saudis continue to insist that the market is in balance, effectively quelling any prospect of an output increase. Riyadh’s priority going into next week’s meeting will be maintaining a limited spare capacity cushion and ensuring Russia remains a part of the OPEC+ framework.

Once these two risk events are in the rear-view mirror there will be little to prevent fundamentals from being in the spotlight once again. For all the talk of a demand-sapping recession, the near-term demand outlook remains favourable. OPEC sees the demand for its crude rising by 1 mbpd in 4Q22 from the current quarter. In fact, oil demand could surprise to the upside in the year-end period. Meanwhile, a squeeze on Russian oil and gas supply is on the cards amid a combination of western sanctions and Moscow’s penchant for weaponizing its energy exports.

Supply is a dead cert to remain tight with demand still high. Reflecting the supportive supply-demand backdrop are physical oil markets. Physical barrels are still fetching hefty premiums over their futures counterparts. Dated Brent is trading around $5/bbl above the ICE Brent contract. But there are signs the futures market is starting to play catch up. Speculators increased their bullish bets in ICE Brent in the week to July 19. The managed money net long grew by 15 million bbls over the last reporting week, the first increase in five weeks. Moreover, the move was fully driven by fresh buying, with the gross long increasing by 16 million bbls. This is a sure-fire sign that oil has reached a bottom and that a sustained price rally could be on the horizon.