There had to be something of reckoning at some stage, either the crude contracts would have to give up some of their backwardations, or flat price would have to pull its socks up and join in. Intent then was seen after the expiry of the April contract in Brent and the M2/M3 transitioning to M1/M2 having only topped the board for a little while, proceeded to rally 20c/barrel layering more ideas of a market that at present is tight nearby. With such encouragement WTI finished the week +$3.48/barrel (4.55%) and Brent, because of the contract change, slightly behind at +$1.93/barrel (2.36%). The products made ground but in a chequered fashion caused by the heavy contango experienced in RBOB futures due to spec change at expiry and the very sullen behaviour of Heating Oil which despite shuttering of US refiners still has poor implied demand. Heat on the week ended +1.45c/ gallon (0.54%), RBOB +33.77c/gallon (14.83%) and Gasoil +$18.75/tonne (2.25%).

Faced with crude prices that are beginning to trend in how they are ‘rolling up’ in positive backwardation and holding onto flat price gains, positioning from shorts has seen something of a lightening. Not since October of last year have short positions been lower, with money managers increasing length in WTI by 35k lots as of February 27 and there is little doubt that wider equity success is aiding investors to seek risk elsewhere. In a stark, but expected reminder that all is not well in the Red Sea, the UK registered ship Rubymar finally sank after being hit by a missile in February and although the US is insisting that a ceasefire be put in place by the start of Ramadan next Monday, the language from Hamas and Israel is hardly conciliatory. There is another event/data deluge this week which includes the State of the Union address by President Biden, US non-farm payrolls, EU GDP, ECB rate decision and the National People’s Congress in China where determination of fiscal policy will be laid out and possibly stimulus. What with OPEC’s decision over the weekend, it will not be dull.

OPEC will be sorely tested in 2024

One wonders whether the challenges faced by OPEC as a group will lead to 2024 being one of the biggest tests for unity. Indeed, with Angola exiting stage left, the group must be hoping that it was a disgruntled maverick move rather than a precursor and or encouragement for when others might follow. Even as we ponder, motions are underway and under the radar, where the author of the defensive output cuts, Saudi Arabia, is no doubt trying to corral its cartel brethren into extending voluntary cuts, not only into the next quarter, but probably beyond. In fact, Saudi became a little testy toward Russia last year, frustrated with its adherence to cut promises. In an attempt to curry favour again, Russia has now promised 471kbpd cuts made up of mixed crude production and product exports, and future data will only tell if Russia is really conforming or indeed whether other OPEC+ members realise the importance of a cohesive message and action.

The need for unity and discipline must prevail bearing in mind the manufacturing data that wanders across the newswires of late with not a hint of any increased activity. Alarmingly, and despite sporadic PBoC and government stimulus interference, the Chinese National Bureau of Statistics Manufacturing PMI matched expectation at 49.1 but represents a contraction that has prevailed now for 5-straight months. Similarly, in Europe, HCOB Manufacturing registered a reading of 47.1 for France, 42.5 for Germany and the EU as a whole at 46.5. The UK fared little better, with the S&P PMI at 47.5 and even the high-flying economy of the United States saw the all-important ISM Manufacturing PMI flail around sub-50 and has not been in expansion since the autumn of 2022.

This then is not a short-term phenomenon, OPEC can ill-afford to treat it as so. Last month’s EIA Short-Term Energy Outlook alluded to some success from the group’s production cuts that will lead to global oil inventory withdrawals during February and March, resulting in an average draw of 0.8 million b/d in 1Q24. However, the outlook also predicted a growth in non-OPEC supply to the tune of the same figure but for the whole of the year, which means if OPEC do increase output at any time in the near future this marginal equilibrium will be upset. Faced with a poor industrial output scenario across the globe, particularly that of China, and the continued threat from non-OPEC supply, the idea of a 1-month extension to cuts would have been an anathema to the market, but whether the group is able to cobble an agreement that takes cuts not only into 2Q but beyond might just be the difference between a run at $90/barrel in Brent or a sink to below $80.

Stacked up against OPEC is the mentioned non-OPEC supply. The major thorn in the side for an OPEC relax is the irrepressible 13.3mbpd production from the US. Yet competition for market space seem to appear and or grow on an annual basis. There is a reason why OPEC tried so desperately to woo Guyana into its membership. Last month, Reuters reported that Guyana has emerged as the world's fastest-growing new oil province in a decade with discoveries of more than 11 billion barrels of oil and gas by Exxon and its partners. At the back-end of 2023 Exxon data showed that the South American country’s production was 400kbpd but has since soared to 645kbpd. Faced with similar competition from Brazil and a free to do whatever it likes Angola, is there anything other than keeping to the well sung hymn sheet for OPEC?

We believe that the last OPEC meeting when Saudi forged ahead with more voluntary cuts and asked other members to contribute using only trust as an incentive, might have just been the thing that held the group together. Although success has been limited, the alternative would have been catastrophic for the oil price and no matter that some members would get to pump at full capacity if the group fell apart, they would be selling into a market that might just only be offering them $50/barrel or some such arbitrary disastrous level. The bare minimum that OPEC+ had to achieve is a rollover into 2Q, where at the end of summer there will still be a gasoline season and hopefully an emerging distillate one.
 

Overnight Pricing

john.evans@pvm.co.uk

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