OPEC+ spare capacity to keep oil prices in check

HSBC Global Research has predicted that Brent crude prices will remain range-bound at $75 per barrel to $85 per barrel in the mid-term as with spare production capacity by OPEC+ enough to offset any geopolitical risks. According to HSBC, OPEC+ will see its spare production capacity increase to 4.5 million b/d at the end of 2024, up from 4.3 million b/d at the end of 2023, which should be enough to dampen price spikes.

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“Trade disruptions in the Red Sea add only a marginal premium to oil prices and no physical supplies have been lost so far,” the analysts have said.

Oil prices have also come under pressure after interest rates reversed their earlier trajectory and the U.S. dollar strengthened. Commercial interest rates have been ticking higher over uncertainty regarding the timing and magnitude of the expected rate cuts by the Federal Reserve. The 10 -year Treasury has gained nearly 40 basis points since the final week of 2023 to the current yield of 4.147% while the U.S. dollar index has gained nearly 3%.

At its last meeting held in December, the Fed announced that it would perform a series of interest rate cuts in the current year with its two-year battle against inflation nearly won. However, the markets don’t see the cuts coming before soon and have priced in a 71.4% likelihood of at least a quarter-point cut in March with a total of seven cuts expected in the course of the year.

However, Wall Street is less optimistic and has tempered its expectations of the number of rate cuts. To wit, Goldman Sachs has predicted the Fed will only make five cuts while Bank of America and UBS have predicted we will see only four cuts.

“The Fed will start cutting the funds rate soon, most likely in March. After all, Chair Powell said at the Dec. 13 press conference that the committee would want to cut ‘well before’ inflation falls to 2%. However, we expect ‘only’ five cuts this year, below the six-to-seven cuts now discounted in market pricing, and we view the chance of 50 basis point steps as low,” Goldman Sachs has said.