Tightness Takes Hold Of The Oil Market

By Warren Patterson, Head of Commodities Technique

Oil costs nonetheless have extra upside

Whereas the oil market has seen fairly a little bit of power in latest weeks on the again of tightening within the bodily market, we imagine that there may be nonetheless room for the market to maneuver larger. Our stability sheet means that the oil market will proceed to tighten as we transfer by the second half of the yr with a deficit within the area of 2MMbbls/d.

We have now left our forecasts for the rest of the yr unchanged. We nonetheless count on ICE Brent to common US$86/bbl over 3Q23 and US$92/bbl over 4Q23.

Our stability exhibits that the market will stay in deficit over 2024. Nevertheless, this deficit is closely skewed in direction of the second half of 2024. The truth is, we see a small surplus in 1Q24, which means that costs may pull again early subsequent yr, earlier than transferring larger as soon as once more. Whereas we nonetheless count on Brent to common US$90/bbl over 2024, we’ve got revised the profile.

The belief behind our 2024 forecasts is that OPEC+ sticks to its deliberate manufacturing targets, while the 1.66MMbbls/d of further voluntary cuts from a handful of OPEC+ producers additionally proceed by 2024.

Oil market set to stay tight by 2024 (MMbbls/d)

Saudi cuts intensify market tightening

It was largely anticipated that the oil market would tighten over the second half of 2023 as a consequence of OPEC+ provide cuts and additional demand progress. OPEC+ has a manufacturing goal of 41.86MMbbls/d by till the tip of this yr and 40.63MMbbls/d for 2024. Nevertheless, in actuality, we’re seeing a lot deeper cuts from OPEC+.

Firstly, a handful of OPEC+ members have made further voluntary provide cuts of 1.66MMbbls/d. These are at the moment set to proceed by till the tip of 2024.

Along with this, Saudi Arabia introduced an additional voluntary lower of 1MMbbls/d for July however has since rolled this over in August and extra not too long ago into September. Saudi Arabia will need to watch out with the way it goes about unwinding this. The continuing cuts have lastly had their desired impact for OPEC+ and particularly Saudi Arabia. Enjoyable them too quickly or too rapidly will clearly have an undesirable affect on costs. That is notably the case in the meanwhile, the place considerations are rising over the state of the Chinese language financial system with it clearly not recovering on the tempo many had anticipated.

OPEC+ cuts and crude high quality

The dimensions of cuts we’re seeing from OPEC+ might need taken time to be mirrored in outright costs in addition to time spreads. Nevertheless, the place it has been way more evident for a number of months, and solely changing into more and more extra obvious, is in high quality spreads. OPEC+ cuts have led to a discount in medium bitter crudes, while the availability progress we’re seeing will probably be largely pushed by lighter candy crudes. This development is nicely mirrored within the Brent/Dubai unfold which is seeing Brent buying and selling at an uncommon low cost to Dubai. The truth is, the unfold has traded to deeper reductions than seen in 2020, the place we noticed 10MMbbls/d of provide cuts from OPEC+. The transfer within the unfold means that we needs to be seeing Asian consumers turning more and more to cheaper Atlantic Basin crudes. It’s tough to see a fast reversal within the Brent/Dubai unfold, at the very least till we begin to see Saudi and different OPEC+ members unwinding provide cuts. Within the absence of this, we might seemingly must see a tightening within the mild candy market.

The tightness within the medium bitter crude market is having an affect additional downstream as nicely, with it resulting in a tightening within the excessive sulphur gasoline oil market. And in reality, in NW Europe this has seen the HSFO crack briefly commerce at an uncommon premium.

Russian oil provide dangers

Since Russia’s invasion of Ukraine, there has clearly been loads of uncertainty over how Russian oil flows would evolve. Nevertheless, Russia has stunned many available in the market with how cussed its export volumes have been. Giant reductions have ensured that there have been keen consumers for this crude. Though, admittedly seaborne exports have been trending decrease extra not too long ago, and the four-week rolling common has fallen beneath 3MMbbls/d, which is the bottom stage seen for the reason that begin of the yr.

The availability cuts beforehand introduced by Russia lastly look like feeding by to decrease export volumes. Though, it’s additionally value stating that with Urals now buying and selling above the G7 value cap, Western delivery and insurance coverage can’t be used, though Russia appears to have constructed a fleet massive sufficient to get across the value cap.

There has additionally been a rise in tensions between Russia and Ukraine after Russia pulled out of the Black Sea Grain Initiative and threatened that any vessels calling at Ukrainian Black Sea ports may very well be handled as a possible navy goal. This growth has solely elevated dangers within the Black Sea with Ukraine retaliating with the same menace. This clearly poses a possible danger to Russian crude oil exports from Novorossiysk with exports within the area of 500Mbbls/d. Nevertheless, this isn’t the one quantity exported from Russian Black Sea ports, Kazakhstan additionally exports within the area of 1.3MMbbls/d from the CPC terminal in Novorossiysk.

For now, although, the danger to this provide is regarded as low. While Ukraine has focused two Russian vessels not too long ago, it has shunned concentrating on business vessels. Any disruptions to power or meals provides from the area will seemingly not be nicely acquired by Western allies.

US drilling exercise continues to gradual

The variety of energetic oil rigs within the US has fallen by a bit of greater than 15% for the reason that begin of the yr to 525, in line with Baker Hughes, which has left oil rigs at their lowest ranges since March 2022. This slowdown in drilling exercise will unsurprisingly have an effect on the availability outlook, particularly over 2024. US crude oil provide is anticipated to develop by a bit of over 200Mbbls/d between July and December this yr, while in 2024, common annual provide is anticipated to develop by a bit of greater than 300Mbbls/d year-on-year. Whereas extra modest provide progress is anticipated, the US remains to be forecast to provide file ranges of crude oil this yr in addition to in 2024.

As for US inventories, business inventories proceed to development decrease, having fallen by near 42MMbbls since mid-March to a bit of beneath 440MMbbls at the moment. Shares are at their lowest ranges since early January, and while they’re above the degrees seen at this stage final yr, they’re trending slightly below the five-year common (a quantity which is admittedly inflated by 2020 stock numbers). We’re prone to see crude inventories proceed to development decrease till September, which is once we ought to begin to see refinery run charges fall as a consequence of refinery upkeep.

International oil demand progress dominated by China (MMbbls/d)

Demand considerations linger

Regardless of lingering demand considerations, world oil demand remains to be set to develop by round 1.9MMbbls/d this yr to a file 101.8MMbbls/d. Greater than 60% of this progress is pushed by China. Due to this fact, it’s not too stunning to see that the oil market is nervous given the weaker-than-expected Chinese language macro knowledge that we’ve got seen not too long ago. Nevertheless, regardless of this weaker knowledge, the oil-related numbers stay largely supportive. Crude oil exports to date this yr common 11.26MMbbls/d, up 12.4% YoY. Refinery exercise has hit file ranges this yr, with a file 14.94MMbbls/d processed in March, while exercise in July was the second highest on file.

Lastly, obvious oil demand has additionally hit file ranges this yr with the post-Covid rebound. Clearly essential for the market is whether or not these numbers are sustainable over the second half of the yr, given the slowdown we’re seeing in different elements of the financial system.

The US for a lot of the yr has additionally been a priority for the market. Given the tempo of fee hikes, market contributors had been anticipating a reasonably aggressive slowdown within the latter a part of 2023. Nevertheless, the market is coming round to the concept that the US might be able to pull off a delicate touchdown. We’re nonetheless assuming that US oil demand will probably be largely flat year-on-year, however this can be too conservative, provided that implied gasoline demand has been monitoring above final yr’s ranges for a lot of the yr. Implied US gasoline demand to date this yr has averaged 8.88MMbbls/d, up by 1.4% YoY.

Speculators nonetheless holding a reasonably impartial place in ICE Brent (000 heaps)

Speculators holding again

Speculative exercise in oil, as in most commodities, continues to be comparatively muted. That is regardless of constructive oil fundamentals for the rest of the yr. Speculators look like reluctant to hold an excessive amount of danger at a time when China’s restoration is clearly not going to plan, whereas there has additionally been loads of uncertainty over how way more tightening we may see from central banks.

While you mix these uncertainties together with larger charges, speculators could also be much less keen to carry too massive an publicity in oil. Nevertheless, any change in speculative urge for food, mixed with the present supportive fundamentals, may propel costs larger. From a historic perspective, speculators nonetheless have loads of room to extend their positioning.

ING oil forecasts

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