According to a new Rystad Energy report, Brent oil prices have shifted very little over the last two weeks, staying in the range of $65 to $66 per barrel. The Russia-Ukraine peace talks loom large, with bearish sentiment winning out in anticipation of Russian barrels making a return to global markets.
“The probability of the U.S. placing stronger sanctions on Russia is waning, with the market expecting Russian oil trade to make a comeback as a result of the peace talks — yet this sentiment masks emerging signals toward upside,” said Mukesh Sahdev, Rystad’s Senior Vice President, Chief Oil Analyst.
“Rystad Energy analysis of storage fundamentals, particularly as China’s stockpiling continues with 10% higher imports than needed, indicates that oil prices are unlikely to tank to level of $60 /bbl and stay there for long,” Sahdev continued.
“There is also a lack of clarity around the OPEC+ unwind on which barrels will be exported vs. fed into their own refining system. We are in an opaque vs. non-opaque fundamentals era, with OPEC vs. non-OPEC production becoming an outdated method of analyzing global oil markets. The prompt time spreads between Brent and WTI continue to signal a tighter market. Overall, our view is that backwardation will continue to roll and it’s not time to stay short for long. The path to peace is likely to be non-linear.”
Here’s a list of important factors pointing out that we are not entering prices near $60/bbl nor contango anytime soon:
As per our analysis, EIA is expected to report a 3.59-million-barrel draw in U.S. commercial crude inventories for the week ending 15 August. This would follow last week’s unexpected 3.04-million-barrel build. Despite that build, U.S. commercial crude inventories remain 4 million bbls below last year’s level, highlighting that balances are still relatively tight. US production is unlikely to pull any surprise increase in Q4.
The bearish pressure from OPEC+’s confirmed unwind of its 2.2 million bpd of voluntary cuts by September is strong, with expectations of oversupply into late 2025. However, it is important to note that OPEC+ has raised targets and may not produce at the announced levels. All the increase is not going to be made to the export market. The Middle East refinery runs are likely to stay in the range of 9.6-9.8 mbpd. While the refinery runs will decline in the Atlantic (U.S. and Europe), the refinery runs are likely to increase by 1 million bpd by Sept. or Oct. relative to July.
While the global liquid balances are no doubt indicating surplus in range of 0.8 to 1.8 million bpd for the rest of the year, it is also evident that China is removing a lot of supply into the storage. By some estimates, China will add close to 250-300 million bbls in storage if it keeps buying imports at 10% higher rate than refinery crude demand. This buying certainly keeps Russia supported with higher pressure on India to reduce the Russian purchase. Between Aug. and Sept., Russia has plans to compensate for its earlier overproduction by aligning with OPEC+ quotas.
Canada production is going into maintenance in next few months. Petrobras in Brazil is going to face a revised oil pricing reference from September, that is likely to impact offshore and onshore operations. The CEO has indicated Petrobras is working to adapt its five-year spending plan to lower prices of around $65 per barrel.
While it is extremely difficult to predict what happens next in the complex peace process involving Ukraine and Russia, the signals are there that oil prices are not tanking to very low levels and Russian energy will flow easily. Despite a significant drop in bullish Nymex WTI crude net-long positions, there are signals for accumulation among the commercials and some exhaustion in downward momentum. The unsolved fundamentals are likely to be resolved without crashing oil prices. The trading world is likely to witness many unexpected trade flow shifts ahead like news of the export of diesel from India to China.
