No signs of prices easing as traders turn bullish on oil demand growth
Crude oil prices averaged higher, rising for the third consecutive week. The uptrend taking Brent and WTI futures above $120 a barrel has forced options market participants to restructure their hedging strategies. Traders turned bullish on oil demand growth after China gradually lifted some COVID-19 restrictions and the summer driving season kicked off in the US. This was along with tightening oil supply outlooks after the EU member states agreed to impose gradual sanctions on Russian crude oil and refined products imports.
Amid soaring simple and complex refining margins, Saudi Aramco increased July official selling prices by more than the Dubai market structure would have suggested while keeping light/heavy spreads relatively narrow.
Traders remained uncertain about the ban on the insurance and reinsurance of Russian oil tankers, which could further affect the oil market. Oil trading remained volatile as investors weighed bullish global oil fundamentals against inflationary concerns and economic headwinds.
Money managers continued to raise total net long positions amid prospects of tightening oil supply and strengthening demand during the driving season in the Northern Hemisphere. However, concerns about short-term oil supply eased slightly on the expectation of higher supply from other producers in the coming months, which calmed concerns about oil supply.
The main driver for higher prices is the sixth wave of EU sanctions against Russia agreed in principle on May 30, which will see at least 2 million barrels per day of Russian oil (crude and products) gradually backed out of Europe within six to eight months.
As with previous EU sanctions, the sixth wave of EU sanctions added to supply uncertainty and boosted already strong refinery margins, which are incentivizing refiners to ramp up runs to full capacity following seasonal maintenance.
Even if the latest EU sanctions fail to significantly influence total Russian oil exports, as was the case with previous sanctions and boycotts, they will most certainly result in Russian crude and product supply to Europe gradually declining.
Oil prices were buoyed by Energy Information Administration data showing a drop in crude oil stocks at Cushing and a decline in US gasoline stocks amid increased demand and refinery intake. Market sentiment was also supported by expectations that China’s oil demand will increase in the coming weeks, which supports fundamental outlooks.
Oil markets were further supported as spare capacity dries up. This was indicated from recent talks by OPEC Secretary General’s Office and some producers as OPEC+ started increasing production from August 2021.
Market sentiment was also boosted by the latest forecasts from major investment banks that sharply raised oil price forecasts for 2022.
June global crude balances feel even tighter as CPC Blend exports from Kazakhstan are down in addition to lower Russian supply to Europe. In addition, it remains uncertain when Libya’s production will recover fully. The increase in backwardation also indicates how tight the physical market is now.
Moreover, there may be further upside in the immediate short-term due to concerns that the attempts to reach a new nuclear deal with Iran are on the verge of breaking down, with Tehran threatening to remove the International Atomic Energy Agency monitoring cameras. Iran remains a wildcard.Total North Sea loadings in July are scheduled to increase by 310,000 bpd on month to month basis to 1.8 million bpd. The increase is largely due to the end of field maintenance affecting the Ekofisk crude stream.
However, in the UK, separate strike action involving around a dozen key workers represented by the Unite union will begin continuous strike action from midnight on June 20 at the main port in Lerwick, Shetland Islands. The strike action would affect cruise liners, oil and gas vessels using the port, and general shipping. Due to the proximity of the site to the Flotta oil terminal, loadings may be impacted.
Chinese imports rose to 10.8 million bpd in May, higher by 0.3 million bpd compared with 10.5 million bpd in April 2022, but this led to large crude stock builds. Refiners have had to adjust forward planning to counter lower demand in April and May amid heavy COVID-19 lockdowns, which means Chinese buying will be capped somewhat even as demand recovers in the near term.
Oil’s structural deficit, therefore, remains unresolved. Supply remains inelastic to higher prices. On the demand side, the negative global growth impulse remains insufficient to rebalance inventories at current prices. As a result, oil prices need to rally further to normalize the unsustainably low levels of global oil inventories and OPEC and refining spare capacities.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.