Upturn for manufacturing tipped to lift oil prices

Vijay Valecha, AGBI, June 21, 2024

Rising manufacturing activity worldwide is likely to support higher oil prices in the second half of the year, a supply chain indicator suggests.

However, analysts have warned that spare capacity among Opec+ and other oil producers is likely to ease upside pressure on crude prices.

The GEP Global Supply Chain Volatility Index hit 0.21 in May – its first return to positive territory since March 2023. The index tracks demand, shortages, costs, inventories and backlogs in manufacturing around the world. 
 

Stronger demand, which picked up after a period of weakness in 2023, has spurred activity across global supply chains, the index shows.

Major Asian exporters such as China, India and South Korea are reporting higher levels of activity while suppliers to North America and Europe are also busier, according to the index. China is the world’s largest importer of crude oil and the US is the biggest consumer.

Vijay Valecha  chief investment officer at Century Financial in Dubai, said increased manufacturing requires substantial energy – with oil serving as a primary source.
 

“An uptick in manufacturing often leads to increased logistics activity and oil demand,” Valecha said.

"Hence, revenues for logistics and cargo companies, as well as major oil-producing firms, are expected to outpace potentially rising fuel costs, driven by increasing demand.”

However, analysts expect Brent crude prices to stick around the current level of $85 per barrel.

James Swanston, senior economist at Capital Economics, said rising output from producers in and outside Opec+ was likely to ease upside pressures on oil demand and prices.

Swanston expects the oil price to hover around its current level and end the year at $80 per barrel.

Matthew Wright, a senior analyst at Kpler, which tracks shipping around the world, also pointed to the persistent security concerns in the Red Sea and their impact on global supply chains.

Seaborne dry cargos and tankers have opted for the longer, safer route around South Africa. The higher transport costs are likely to dampen oil demand, he said.

“Transportation of oil cargos via the Red Sea remains well down on last year levels and the freight market has now adjusted to account for this.

"We don't expect any change in the situation for the time being. Even a Gaza ceasefire is unlikely to result in the Houthis stopping attacks in the Red Sea,” Wright said.

Source

AGBI