Last week, crude oil futures settled at their highest levels in more than two months while energy stocks scored their best week since March 2023 thanks to a cornucopia of catalysts including escalating tensions in the Middle East, a Ukraine drone attack on a Russian oil refinery, production glitches in the U.S., inventory drawdowns that were much larger than forecast, stronger than expected Q4 GDP growth in the U.S amid declining inflation and increased prospect of more economic stimulus from China.
With so much support, hordes of energy and natural resource stocks made double-digit gains by the end of the week led by NuScale Power Corp. (NYSE:SMR) +38.2%, Verde Clean Fuels Inc. (NASDAQ:VGAS) +27.5%, Plug Power Inc. (NASDAQ:PLUG) +26.8%, W&T Offshore Inc. (NYSE:WTI) +24.4%, NuStar Energy (NYSE:NS) +19.6%, Nabors Industries Ltd. (NYSE:NBR) +14.7%, Liberty Energy Inc. (NYSE:LBRT) +14.3%, RPC Inc. (NYSE:RES) +14.2%, PBF Energy Inc. (NYSE:PBF) +13.6% and YPF Sociedad Anónima (NYSE:YPF) +13.2%.
For the bulls, it appears that the bearish sentiment that has pervaded the energy markets in the new year won’t go away easily: Oil prices and energy stocks have kicked off the new week on a negative footing with both WTI crude, Brent crude as well as energy stocks losing some steam. Commodity experts at Standard Chartered have reported that, with a few exceptions, money manager positioning in the energy and commodity futures markets is just as bearish as it was in the early part of 2023.
However, the big difference this year is that much of that negative sentiment is not supported by actual fundamentals. To wit, StanChart has noted that global oil demand remains robust, with demand growth forecasts for 2024 by Wall Street and various energy agencies having moved higher over the past three months.
Sources: Standard Chartered Research
StanChart notes that a large part of the [negative] narrative is the view that demand growth has mostly come in below expectations. But that belief is contrary to actual data regarding 2024 global oil demand growth forecasts made over time by StanChart, the International Energy Agency (IEA) and the Energy Information Administration (EIA).
Whereas the EIA forecast is weaker than a year ago, StanChart’s is slightly higher while the IEA forecast is significantly higher than it was when first introduced in June. Meanwhile, the OPEC Secretariat forecast (not shown on the chart) remains unchanged at 2.25 million barrels per day since its debut in July.
Last year, oil demand surprised to the upside compared to January 2023 forecasts; forecast for the current year by the IEA estimate is 380 kb/d higher, the EIA estimate is 881kb/d higher while StanChart’s is 819 kb/d higher.
Oil Markets Seriously Underpricing Geopolitical Risks
Other than oil demand remaining robust, StanChart contends that oil markets are seriously underpricing geopolitical risks and oil prices are currently discounted by at least $10/ barrel to their fair values.
Last week, HSBC Global Research predicted OPEC+ has ample production capacity that will suffice to offset current geopolitical risks, adding that oil prices are likely to remain range-bound in the mid-term. According to the analysts, OPEC+ will have 4.5 million b/d in spare capacity at the end of 2024, up from 4.3 million b/d at the end of 2023. Additionally, HSBC has pointed out that OPEC+'s strategy to influence prices through production cuts has largely been blunted by surging production from non-OPEC members, especially the United States.
"Trade disruptions in the Red Sea add only a marginal premium to oil prices and no physical supplies have been lost so far," HSBC has said.
But Standard Chartered begs to disagree, and has reiterated its earlier position that oil markets are seriously underestimating geopolitical risks. According to StanChart, a big reason why the markets are heavily discounting these risks is due to a lack of clear understanding about seasonality. In StanChart’s view, the market is incorrectly interpreting a normal seasonal oversupply in January as fundamental weakness.
However, they experts have predicted the markets will gradually tighten as the months roll on–again, due to seasonality. Oil markets tend to tighten significantly from late January as demand recovers from seasonal lows.
StanChart has predicted that the global crude inventory build of 1.17 mb/d in January will flip to a draw of 1.40 mb/d in February, which will then increase to a draw of 1.48 mb/d in March, largely due to the seasonal demand recovery.
Now here’s the main kicker: StanChart says the seasonal upswing in demand, coupled with the expected inventory draws, will make the markets much more sensitive to geopolitics and could trigger a significant oil price rally.
By Alex Kimani for Oilprice.com
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