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Tight Oil Supply and US Production Downgrades Expected to Drive Prices Up and China Growth Concerns

Oil market braces for tighter supply, RBC's Helima Croft forecasts

Croft announces significant reductions in US oil output projections

Expect rising crude prices with Brent poised to reach $85

Bonus part: China aims for a 5% economic growth target in 2024

Crude oil prices are on the verge of a significant rise, as per Helima Croft, a top commodities strategist at RBC Capital Markets. She highlights a looming shift in the oil market's supply-demand dynamics, forecasting a potential slowdown in global crude production. This slowdown might push Brent crude prices to $85 in the latter half of 2024.

"It's not that we're saying that US production is not going to grow. It's just a question about, were the gains that we saw last year due to particular unique circumstances that are not going to be replicated this year," Croft said.

The US, after a standout year of oil production in 2023, is expected to see a slowdown, with growth projections halving from 1 million to 500,000 barrels per day this year, based on insights from the recent International Energy Week. This trend is not unique to the US; other major oil producers, including Guyana, face challenges in maintaining their recent production booms.

Additionally, tensions in the Middle East could further constrain supply, particularly if the conflict involving Israel and Hamas escalates to involve Lebanon, a scenario Helima Croft views as a significant risk given Iran's position in global oil production.

OPEC+ members plan to sustain their production cuts, extending a collective reduction of 2.2 million barrels per day through June.

Brent crude edged up slightly to $82.88 a barrel, while U.S. West Texas Intermediate (WTI) experienced a minor drop to $78.68. This year, Brent has seen an almost 8% increase.

Despite these price movements, Croft tempers expectations of oil hitting $100 a barrel soon. Meanwhile, global oil demand continues to rise, with projections suggesting a peak increase of 1.2 million barrels per day by 2028. This could lead to a market shortage as early as 2025, according to Vicki Hollub, CEO of Occidental.

China's Economic Reforms

Oil prices found their footing after a recent dip, thanks to OPEC+'s commitment to keeping supplies tight. This decision counterbalanced worries about China's economic expansion and global interest rate uncertainties.

China aims for a steady 5% growth in 2024, matching last year's target. However, the absence of significant stimulus measures to boost the economy has left investors wanting more.

Tamas Varga from the brokerage PVM notes that despite the lukewarm reaction to OPEC+'s decision to continue its production cuts, a tightening in the global oil supply is expected. This tightening could help prices recover from any short-term drops, whether they're real or just perceived.

OPEC+ recently decided to keep reducing their oil output by 2.2 million barrels per day into the next quarter, showing a serious commitment to market stability.

Concerns extend beyond China to broader economic uncertainties, partly due to unclear directions on interest rate cuts in the U.S. and elsewhere. The Atlanta Fed President, Raphael Bostic, mentioned that with the economy and job market in good shape, there's no immediate need to lower rates.

Upcoming U.S. inventory reports are also in the spotlight. They're expected to show an increase in crude stocks by about 2.6 million barrels, with a forecasted decline in distillates and gasoline reserves.

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