Markets stay volatile even as deficit concerns support current prices

Markets stay volatile even as deficit concerns support current prices

Markets stay volatile even as deficit concerns support current prices
The Bryan Mound Strategic Petroleum Reserve, an oil storage facility, is seen in Texas, US. (Reuters/File)
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Crude oil prices fell driven by weaker-than-expected Chinese manufacturing data, a rebound in Libyan production to 1.2 million barrels per day and further bearish macroeconomic news.

However, prices recovered considering International Energy Agency’s latest market outlook. It forecast an upward revision to this year’s world oil demand of 0.4 mbpd from 1.7 mbpd last month to 2.1 mbpd, expecting higher natural gas prices due to Russian export shortfalls.

The Organization of the Petroleum Exporting Countries' latest market outlook revised downward its demand growth but remain strong for 2022 to 3.1 mbpd.

The Ukraine war and Russia’s squeeze on gas supply to Europe have pushed European gas prices far above coal and oil on an energy equivalence basis. This development has put pressure on some countries that can increase their gas-to-oil fuel switching.

India’s July oil demand was weaker than expected as heavy rains, and severe flooding in some areas dampened mobility. Demand between July and September is expected to dip sequentially due to the monsoon season before rebounding between October and December due to the festive and holiday seasons. India’s demand is expected to grow 270,000 bpd in 2022, driven by middle distillates.

US data showing inflation easing slightly in July helped to shift expectations from another massive 0.75 percent rate hike in September to a smaller 0.50 percent. In addition, data showed the US economy added 528,000 jobs in July — much higher than the consensus estimates of 250,000 more jobs.

The nuclear deal with Iran, formally known as the Joint Comprehensive Plan of Action, resumed in Vienna last week. According to statements from both European and Russian officials, the US and Iran will now have a few weeks to accept the deal. The deal may have less than a 50 percent chance of getting finalized, but a sudden breakthrough cannot be ruled out.

A positive conclusion could heighten the prospect of higher Iranian oil exports, adding to downward pressure on oil prices. On the other hand, there may be a bullish market reaction if the latest negotiations fall through after getting so close to an agreement.

Despite the recent price weakness, which may now be overdone, the market still faces substantial supply uncertainties.

In addition to Iran and Libya, where renewed production problems are still an ongoing hazard due to the political situation, there is also the potential for seasonal hurricane-related supply outages in the US in the next few months.

Looking further ahead, we continue to expect renewed trade frictions in late September or early October in anticipation of the start of the European Union’s Russian import ban in early December. This period is when EU buyers of Russian crude will need to start seeking alternative supplies for December delivery.

Price risk is being skewed upward unless there is a sudden breakthrough in the Iran nuclear talks. However, the current stock level is expected to continue setting a floor for structure across the curve.

After enjoying months at record-high levels, refinery margins in Asia decreased sharply, especially for simpler refiners processing sour crude grades.

Refiners relished high margins from April to early July, firmed by robust international cracks and sweetened by the import of discounted Russian crude. The refinery margins may be further easing in the coming months.

The sudden fall in Asian margins, especially for topping and cracking, may tempt refiners to cut processing rates and reduce the supply of refined products, thus providing a potential floor for prices.

However, if this results in higher retail prices across the region, it will only exacerbate the economic slowdown and cause further loss of demand.

Refiners in other regions with high operating costs may be more likely to cut runs earlier, especially those relying on spot purchases of currently expensive natural gas, such as Europe.

Refinery margins in Asia showed marginal recovery compared with last week thanks to new tax inspections, which weighed on Chinese independent refinery utilization rates and product output, as they limit runs to avoid heavy tax burdens.

OPEC announced Aug. 3 that it would increase its quotas by just 0.1 mbpd per month in September, highlighting the limited availability of excess capacity. However, it also indicates that the market remains in tight supplies supporting at least the current price level despite concerns related to slow economic growth.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view