It all Depends on Demand

This weekly report is an excerpt from our Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.  Contact John Paisie (+1-832-517-7544 or E-mail) for the detailed analysis or for more information about the Short Term Outlook.


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The price of Brent crude ended the week at $112.55 after closing the previous week at $111.33. The price of WTI ended the week at $110.28 after closing the previous week at $110.49. The price movements of last week aligned with our expectations that oil prices would drift sideways.

The supply situation continues with US production creeping slowly upwards, OPEC+ struggling to meet agreed production quotas, and Russia shifting volumes towards Asia. Meanwhile, members of the EU are still negotiating a formal ban on imports of Russian crude oil and oil products. However, the longer the negotiations go on there is an increased possibility of a ban never being implemented. This possibility is highlighted by talk about the EU employing an import tariff on Russian oil with the idea that Russia crude oil will remain on the market, thus preventing price spikes, while reducing the amount of revenues that will be received by Russia. Additionally, with more time Russia will be able to place increased volumes into alternative markets, which will make a ban from the EU of limited relevance. This risk is highlighted by increasing demand from India and China, whose imports of crude oil from Russia has increased substantially. Additionally, China is discussing additional purchases of Russian crude oil to fill China’s strategic petroleum reserve.  

Meanwhile, the outlook for the global economy looks less favorable. The falling US consumer sentiment is being joined by the falling sentiment of small-business owners in the US. As reported by the Wall Street Journal, a survey of more than 600 small businesses conducted in May indicated that 57% of small-business owners expect worsening economic conditions, which is an increase from 42% in April. Additionally, the US Dollar Index decreased last week to 103.03 from the previous week of 104.47. The US interest rate on the 10-year bond declined to 2.79% from 2.93%, which is the second consecutive week of decreasing rates. The weakening of the US dollar and the pullback in the interest rates are signs of concerns about the future economic growth and the growing risk of a potential recession in the US. Last week, the European Union reduced its forecasts for economic growth from a previous forecast of 4.0% to 2.7% in 2022. The forecast for growth in 2023 was also reduced from 2.8% to 2.3%. In response, the EU extended the suspension of fiscal rules until next year, which will allow members to run larger fiscal deficits.

One favorable factor for oil prices continues to be elevated refining margins. While refining margins in the US decreased last week with gasoline crack spreads and diesel crack spreads narrowing, the latest EIA report indicates that refining utilization increased to 91.8% from 90.0%. Utilization rates are especially elevated in the US Gulf Coast and East Coast, where utilization rates are running at around 95%. Furthermore, inventories of refined products – gasoline, diesel, and jet fuel – are below the 5-year seasonal average. The inventories of diesel are well below typical levels and are running at some 20% below the seasonal average.

Another positive factor for oil prices is that for the first time since the beginning of the Russia-Ukraine conflict, oil traders made a significant move in terms of adding to their net long positions. Last week, traders of WTI crude increased their net long positions significantly by increasing their long positions and decreasing their short positions. The level of net long positions is now the highest since the beginning of February of this year. Similarly, traders of Brent crude also increased their net long positions by increasing their long positions, while decreasing their short positions.

For another week, we are expecting that the price of Brent crude oil will continue to drift sideways, and that an inflection point will not be reached until some major development takes place. Crude prices are likely to break upwards with positive news coming out of China with respect to COVID-19. Reduced inflation data in the US and Europe would also provide a boost to oil prices. Currently, neither of these developments appear to be on the immediate horizon. Conversely, crude prices are likely to break downwards with a collapse of EU’s negotiations to ban imports of Russian oil. It is more likely that the negotiations will drag on until an agreement is reached on some type of a phased-in ban (with exemptions for certain countries). However, because of the time it will take to reach an agreement and the ban not being absolute, it likely that the agreed ban will not result in major spike in oil prices. Neither do we expect any significant supply increases from OPEC+, Iran, Venezuela, or the US in the next few months.

Therefore, the oil price in the near-term is likely to be driven mainly by the strength of oil demand. If the growth in oil demand holds up as we are currently forecasting for the remainder of 2Q and 3Q, the price of Brent crude will drift upwards to around $120.00.

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