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Crude oil concluded its best quarterly gain since the initial months of the war in Ukraine, but Wall Street does not expect the rally to last much longer, as high prices are beginning to dent demand.
Front-month WTI crude (CL1:COM) closed Q3 with its best showing since Q1 2022, +28.5% to $90.79/bbl, and front-month Brent crude (CO1:COM) ended the quarter +27.2% to $95.31; for the week, WTI rose 0.8% and Brent gained 2.2%.
Energy stocks also finished a fine quarter, with the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) up 17%.
ETFs: (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (NRGU), (USOI), (NYSEARCA:XLE), (XOP), (VDE), (OIH), (XES), (IEZ)
But barring a supply crisis, few analysts see oil prices staying above $100/bbl in the near term; most analysts think prices likely will hover near $90 for the rest of the year.
Higher oil prices appear to starting to weigh on demand, J.P. Morgan analysts said; gasoline consumption dropped in July month-on-month more than usual, and airlines recently reported sales at the lower end of expectations.
“Demand risks are shifting to the downside,” Natasha Kaneva, JPM’s head of global commodities strategy, wrote. “With pump prices surging and a seasonal travel peak now behind us, a greater share of demand in the fourth quarter will be concentrated in sectors more sensitive to economic growth.”
High oil prices eventually would spark U.S. producers to boost production, UBS analysts say – even as the number of active, oil-targeted rigs in the U.S. has dropped to the lowest total since February 2022.
At some point, Saudi Arabia would try to lower prices by tapping into its large amount of spare crude capacity resulting from its production cuts.
The Saudis are reaping favorable revenues with prices where they are now, and worries about the damage that higher prices could do, CIBC’s Rebecca Babin said.
Energy (XLE) was the S&P’s only positive sector this week, finishing +1.6%.
Top 10 gainers in energy and natural resources during the past 5 days: (METC) +22.6%, (NGS) +16.5%, (WAVE) +16.3%, (HNRG) +15.4%, (KOS) +14.7%, (RNGR) +13.5%, (BTU) +13%, (INDO) +12.8%, (HCC) +11.6%, (CEIX) +11.6%.
Top 5 decliners in energy and natural resources during the past 5 days: (NEP) -39.2%, (NEE) -15.4%, (TPIC) -14.2%, (IE) -13.9%, (AQN) -13.8%.
Source: Barchart.com
