Daily Oil Fundamentals

There is no Truth in Calling for Truce

‘Delusional’, ‘another massacre’, ‘total victory’, ‘we will make sure that Gaza is demilitarized forever’… These are the words Israeli Prime Minister Benjamin Netanyahu chose to use in his reply to the Hamas response, which included a 135-day halt of fighting and a three-phase release of hostages, to the original framework agreement proposed by the US, Egypt, Qatar, and Israel. Without detailing the rights and wrongs of the attitudes that led to the current stand-off in the disturbing Middle East conflict the upshot is that tension keeps brewing, not helped by the US’s modus operandi of ‘preaching water and drinking wine’ as they promote peace but launch attacks on Houthis and the atrocities on commercial vessels are widely expected to continue. The impact of the quasi closure of the Suez Canal on physical oil supply might be exaggerated, nonetheless protracted hostility in the Red Sea adversely impacts investor’s sentiment and therefore financial supply.

Risk appetite consequently has grown also aided by a relatively bullish set of US oil inventory data, which has all the hallmarks of refinery maintenance. Crude oil stocks rose, and product inventories declined as refiners cut back on their activities. Nationwide utilization rates dropped 0.5% whilst runs in the USGC plunged 3% to 77.1%, also feeling the aftershock of the recent cold spell. No wonder then that products rallied harder than crude oil yesterday boosting crack spreads values also supported by resilience US product exports that rose to 6.4 mbpd last week, an increase of 450,000 bpd.

On the financial front the S&P 500 index settled at a record high aided by strong US earnings. The Chinese equity market is also coming out of the doldrums because of short selling bans and state investors expanding their stock buying plans. The mood has undeniably brightened, yet one cannot help but wonder when the Fed’s clear lack of guidance on lowering borrowing costs and stubborn Chinese deflationary pressure will tempt investors to reverse course once again.

The US as the Staunch Supporter of Tighter Oil Balance

By now it is a widely accepted fact that forecasting global oil demand and supply is akin to shoot first and whatever is hit it is called the target. Lack of transparency, uncertain geopolitics and precarious interest rate prognosis all add to dubious predictions of future oil balance. Nonetheless, researchers and forecasters do their best to provide us with their latest findings, which, given the unpredictable backdrop, are revised, and amended on a frequent basis. As usual, the EIA kicked off the latest round of estimates on Tuesday, which will be followed by OPEC on February 13 and the IEA two days later.

The most noticeable change in the EIA’s Short-Term Energy Outlook from last month was the sizeable downgrades both in 1Q demand and non-OPEC supply forecasts. Consumption is now seen 160,000 bpd lower than last month whilst countries outside OPEC will produce 250,000 less than thought. Hence the 90,000 bpd improvement in OPEC call for the incumbent quarter. Global consumption this year will grow almost twice as fast as non-OPEC supply – 1.42 mbpd versus 760,000 bpd. Accounting for the 30,000 bpd growth in OPEC other liquids, demand for OPEC oil is 620,000 bpd higher in 2024 than last year. At 26.77 mbpd it implies an annual average global stock depletion of 110,000 bpd given that the EIA predicts a production level of 26.66 mbpd from the producer group.  It is in contrast with last year’s stock build of 740,000 bpd. This year promises to be tighter.

Although oil prices crawled higher in January, predominantly due to the hostilities in the Middle East, the administration sees no considerable disruption to supply and whatever impact the war has had it has been mitigated by abundant inventories accumulated in 2022 and 2023. It puts the changes in global inventories between October 2023 and January 2024 at 800,000 bpd on average. The EIA left this year’s Brent price forecast untouched at $82/bbl and cut its US retail gasoline price forecast to $3.31/gallon, down from $3.36/gallon in January.

The EIA has always been somewhat of an outlier when it comes to estimating the global oil balance, nonetheless, its forecasts are more accurate on home turf. And based on the latest projections, the world’s biggest oil consumer and producer will contribute greatly to limiting any possible downside potential.

First, supply/production. US oil output has constantly surprised to the upside since the end of the global health crisis. Those expecting sputtering production growth because of capex constraints and dividend priorities have been left disappointed. The 2022 growth 670,000 bpd in domestic production was followed by an impressive expansion of more than 1 mbpd in 2023. The rate of growth will slow to 170,000 bpd this year, down from 290,000 bpd predicted last month. The absolute figure, which is now 13.10 mbpd is a downgrade of 110,000 bpd from January, chiefly the result of the recent tempest-related shut-ins. It will go a long way to help global stocks deplete or reduce surplus, depending what view one subscribes to.

Global demand growth is primarily driven by the expanding economies of developing countries. Almost 90% of the 2024 growth is attributed to non-OECD countries whilst the developed part of the world will experience an annual increase of a mere 160,000 bpd or 11%. What is, however, intriguing to observe is that this rise will exclusively come from the US where consumption will grow from 20.23 mbpd in 2023 to 20.39 mbpd this year. This burgeoning demand is the result of the sturdy economic performance. Both the IMF and the OECD revised upwards their 2024 global GDP forecasts solely because of the US’s buoyant growth rate. The share of hydrocarbon gas liquids in the total US mix will increase year-on-year at the expense of motor gasoline and distillate fuel oil. Of course, a cornucopia of factors will influence the global oil balance this year and there is as strong a case to argue for sub-$70 oil (supply war) as $100+ (full-blown Middle East crisis). The current balance, however, suggests a price range of $70-$90 and the auspicious US outlook might just ensure that this year’s average price will be closer to the higher end.


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© 2024 PVM Oil Associates Ltd

08 Feb 2024