Brent is Unlikely to Rise Significantly Above $82.00

Brent crude prices have increased by 3.7% to $82.50 per barrel, after slightly retreating from $83.48 per barrel on June 12. This recent price fluctuation followed a disappointing Federal Reserve (Fed) dot plot forward guidance, which now includes only one expected interest rate cut this year instead of the three cuts forecasted in March.

The U.S. May consumer price index (CPI) unexpectedly decreased to 3.3% YoY from 3.4% in April, and to 0.0% MoM against an expected 0.1% MoM. The core CPI, excluding volatile food and energy prices, also fell to 3.4% YoY from 3.6% and monthly reading dropped to 0.2% from 0.3%. This CPI data led to a weakening of the Dollar by almost 1.0%, which initially boosted oil prices. However, the Fed's hawkish stance, despite the decline in inflation, sent mixed signals to the market. Policymakers raised inflation expectations for 2024 to 2.8% YoY from 2.8%, contradicting the recent inflation decrease. Fed Chair Jerome Powell suggested that not all Fed members had time to fully digest the new data, which seemed unconvincing given the Fed's access to comprehensive macroeconomic information before publication.

Following the Fed's announcement, oil prices stumbled, and the Dollar recovered almost half of its losses incurred after the inflation numbers were released. Brent crude prices, while formally climbing above the $82.00 per barrel mark, indicate a potential downside reversal, likely driven by elevated volatility. Large investors share this sentiment, as evidenced by the net capital outflows of $93.4 million from the United States Oil Fund (USO) this week, compared to net inflows of $136.7 million the previous week. This suggests skepticism about further price increases, especially after a 7.0% rise from the lows on June 4.

The oil market remains uncertain. The American Petroleum Institute (API) reported a decrease in oil reserves by 2.42 million barrels, while the Energy Information Administration (EIA) observed a rise in oil inventories by 3.73 million barrels. Additionally, the International Energy Agency (IEA) warns of a significant oil supply surplus this decade, contrasting with OPEC and EIA forecasts of decreasing oil production in 2024. Given this uncertainty, Brent crude prices are likely to stay close to the support zone of $80.00-82.00 per barrel.