Lower risk of recession in US and Europe could support oil prices, Saxo Bank says

Opec+ output cuts have created a ‘soft floor’ for crude prices, Saxo Bank’s Ole Hansen says

Brent is down by about 15 per cent since the start of the year as concerns about the global economy weigh on the outlook for demand. Reuters

Europe and the US face a “lower” risk of a recession than previously expected, thanks to policies that promote industrial growth, the head of commodity strategy at Saxo Bank has said.

This is expected to help in allaying some of the worst fears in the oil market, Ole Hansen told The National in an interview, adding that “part of that fear has been adding to some selling in the market”.

Traders in the market are not being driven by the balance between supply and demand but by macroeconomic factors, he said.

Brent, the benchmark for two thirds of the world’s oil, is down by about 13 per cent since the beginning of the year as growing concerns about the global economy weigh on the outlook for crude demand.

However, the Inflation Reduction Act in the US and similar policies in the EU will underpin economic growth in those countries, Mr Hansen said.

“We are increasingly doubting that the recession really will strike, both in the US and Europe. There are simply too many handouts still going on [and] too many projects [on] the industrial front.”

The IRA, enacted last year, offers a series of tax incentives on wind, solar, hydropower and other renewables, as well as a push towards electric vehicle ownership.

It is expected to spur about $3 trillion of investment in renewable energy technology, according to Goldman Sachs.

The REPowerEU Plan proposed by the European Commission seeks to increase the share of renewables in the EU’s energy mix to 45 per cent by 2030. This is up from the bloc’s current target of 40 per cent.

The world economy is set to grow at a slower pace as continued monetary policy tightening to rein in inflation is expected to crimp development, the World Bank said earlier this month.

Growth has been forecast at 2.1 per cent this year, down from 3.1 per cent last year, before recovering to 2.4 per cent in 2024, the Washington-based lender said in its latest Global Economic Prospects report.

“Right now, the market needs growth more than [it needs] to worry about prices because we have gotten used to the prices and it’s not as if we are seeing inflation starting to pick up again,” Mr Hansen said.

“But [prices] will struggle to come back down to the levels we have seen in the past and which [are] being projected by the central banks.”

The main question is if central banks will adjust their long-term inflationary forecasts, said Mr Hansen, adding that 2 per cent inflation target would come at the cost of economic growth.

“They'll have to … kill economic growth in order to achieve that.”

Higher interest rates could slow the global economy and dampen crude demand. The US Federal Reserve increased interest rates by a combined 500 basis points since March 2022.

However, strong crude demand, particularly from China, could push Brent back to the $80 a barrel level, Mr Hansen said.

“It's a patience game right now … the focus on stimulus from China has not really come to fruition,” he said.

“We've seen a few rate cuts but has not really been enough to support the market at this point.”

China’s economy, which rebounded after Covid-19 restrictions were lifted at the start of the year, lost momentum in May, posting weaker retail sales and manufacturing output while registering a slowdown in the property sector.

The world’s largest crude importer recently cut two market-based benchmark lending rates, but the loosening of its monetary policy was less aggressive than what some analysts expected.

Potential measures should stimulate growth and create a change in sentiment “because it seems like the Chinese economy is sputtering … and that potentially is filtering through to consumers in the country”, Mr Hansen said.

The International Energy Agency and Opec expect the oil market to tighten in the second half of the year amid Opec+ cuts and a rebound in Chinese crude demand.

However, resilient Russian crude supply and rising output in countries under sanctions such as Iran and Venezuela could potentially result in a smaller deficit in 2023, analysts have said.

Several investment banks, including Goldman Sachs, MUFG and UBS, have slashed their short-term oil price forecasts over the past few weeks, citing higher-than-expected crude supply in the market.

“The bulk of that [oil demand] increase is projected to start in the third quarter, and that obviously [has created] a lot of nervousness in the market about whether that's going to happen or not,” Mr Hansen said.

“If we don’t see a continued increase in demand, then we have a market that will be challenged and that’s probably one reason why … Opec+ and Saudi Arabia stepped in just trying to meet that risk head on,” he said.

On June 4, Saudi Arabia, the world’s largest crude exporter, announced that it would cut its July output by a million barrels per day and said this could be extended depending on market conditions.

Meanwhile, the Opec+ alliance will stick with its voluntary output cuts until the end of next year.

“My overall take is based on the [assumption] that the Opec+ has created a soft floor under the market [and] there is a fear of selling it aggressively lower simply for risk of additional cuts being implemented,” Mr Hansen said.