Crude prices stay on course with 2022 macro environment
Crude oil prices have been running between $100 and $130 a barrel amid concerns around the political uprising in Eastern Europe.
The market puts the premium for war at $30 a barrel, which means a price range between $70 and $100 a barrel reflects the fundamentals.
It means that the market is well supported, and that uncertainty supports these levels.
The macro-environment in 2022 remained supportive, with a combination of higher — yet far from demand destruction levels — oil prices, elevated natural gas prices, and strong global refining margins paving the way for solid oil companies’ performance.
Prices were impacted negatively by certain developments, namely a fall in major equity indexes triggered by growing concerns about an economic slowdown that weighed on oil demand outlooks.
Oil demand outlooks came under pressure following bearish US economic data in June and US Energy Information Administration weekly report showing fading US gasoline consumption during the summer driving season.
Meanwhile, expectations of a higher global oil supply in the coming months eased worries about a tightening oil market. As a result, the market structure remained strong into backwardation. Moreover, the lower-than-expected refinery supply growth also contributed to the exceptionally high margins, incentivizing maximum processing rates for those refiners.
Refining margins, driven by structural underinvestment in the industry, exacerbated the current geopolitical landscape and global refining capacity closures. As a result, it surged in all main trading hubs. This improvement was attributed to solid gains from across the barrel in the US and Asia. At the same time, more robust transport fuel demand and prevailing Gasoil tightness in Europe led to higher product prices relative to that of crude.
As uncertainty builds around the supply capacity of OPEC+ and the oil demand rages on despite expectations of demand destruction, bullish sentiment is building in oil markets.
Strikes halted operations at France’s Fos Refinery, and Norway’s offshore production was heavily impacted. Oil production in Libya runs between 365,000 and 409,000 barrels per day. The odds of reviving the Iranian nuclear deal are even lower after the Doha talks.
Sanctions have already reduced Russian oil output by 1.0 million barrels per day between February and June 2022. EU embargo may lead to 2 million bpd of shut-ins in the first half of 2023. Production could recover only marginally in 2024 to 9.4 million bpd. Russia’s output will recover to 10 million bpd again in 2026, after 10.2 million bdp in 2022.
Oil demand concerns will persist owing to demand elasticity and a growth slowdown amid the tightening monetary policy of China and Japan. However, at least over the summer, inventory deficits and strained refinery capacity should provide fundamental ballast to oil prices.
Crude exports from the Arabian Gulf countries are expected to increase in the next few months as various OPEC+ member countries raise production in line with the group’s most recent quota increase.
With Asia continuing importing more volumes of discounted Russian crude, AG export grades could be backed out of Asia, putting downward pressure on AG crude and thus making it more attractive to European buyers. However, it is yet to see the impact of calls to restrict the Russian crude further and put a cap on prices as part of further sanctions.