Oil markets have managed to reverse their early week losses, inching up higher in Wednesday’s session after the Energy Information Administration reported significant inventory draws across various fuels. The EIA has reported a smaller crude build of 1.4 million barrels for the week ending March 1 compared with a build of 4.2 million barrels for the previous week, while the American Petroleum Institute has pegged the crude build at just 423,000 barrels. The EIA has also estimated inventory draws of 4.5 million barrels of gasoline and 4.1 million barrels of middle distillates in the final week of February, both figures coming in much higher than draws of 2.8 million barrels of gasoline and 0.5 million barrels of middle distillates reported for the previous week.
Oil sold off in the first two days of the week after OPEC+ announced a decision to extend voluntary production cuts through Q2, signaling potential demand weakness. Adding to the worries was Russia's agreement to take an additional 471K bbl/day voluntary production and export cut in Q2 on top of the 500K bbl/day voluntary reduction it took last year and extended to year-end 2024. Russia announced that it will cut 350 kb/d from output and 121 kb/d from exports in April but the entire cut of 471 kb/d in June will be on oil output. Related: How To Profit From Europe’s $800 Billion Energy Crisis
Commodity analysts at Standard Chartered have taken a bullish view of the extensions, arguing that they will further tighten the market, particularly after Q1’s counter-seasonal inventory draw, since demand is expected to remain healthy. The analysts now estimate that the global market will record an inventory draw of 0.9mb/d in Q2 following a 1.1mb/d draw in Q1, with the total draw across H1-2024 clocking in at 185 million barrels. On a monthly basis, StanChart estimates there will be a surplus of 180 kb/d in April followed by deficits of 1.45 mb/d in May and 1.46 mb/d in June. Further, StranChart says that the latest OPEC+ actions all but eliminate the likelihood of a Q2 surplus, even in more pessimistic predictions. StanChart notes that the EIA model is currently the most bearish among the leading energy agencies; however, the EIA model should now reflect a Q2 draw of 0.6 mb/d if OPEC output remains unchanged, even before factoring in a downward adjustment on Russian output.
Limited Downside To Oil Prices
According to Standard Chartered, there tends to be a significant lag between the oil market’s response to OPEC and OPEC+ developments; however, oil prices should have limited downside at this juncture mainly due to market tightening. Further, StanChart has argued that Russia’s move to be more transparent by shifting to wholly output-based cuts eliminates earlier doubts regarding the authenticity of its claims.
Oil prices are, however, likely to continue facing some downward pressure in the near-term. StanChart has reported that the latest EIA data is bearish for a third consecutive week going by its proprietary U.S. oil data bull-bear index. The analysts note that whereas gasoline inventories fell by 2.83 mb to 244.21 mb, they rose by 1.08 mb against the five-year average thus narrowing the deficit against the average to 3.80mb. A similar pattern was observed with middle distillate whereby inventories fell by 0.51 mb to 121.14 mb but climbed by 2 mb against the five-year average thereby cutting the deficit to the average to 11.07 mb. Implied gasoline demand climbed by 267 kb/d w/w to 8.467mb/d but the average for the first three weeks of February fell by 4.4% Y/Y to 8.302mb/d.
According to StanChart’s machine-learning oil price model dubbed SCORPIO, Brent prices are likely to record a small w/w fall of USD 0.9/bbl for the May contract, the new front-month contract, for the week ending on March 11.
FXPro's Alex Kuptsikevich is more bullish, and has predicted that the extension cut could push oil prices above their recent resistance, adding that "OPEC+ is openly playing on the bulls' side by extending and strengthening [Russian] oil production and export quotas." The analyst says a consolidation above $79/bbl for WTI "would indicate a break of long-term horizontal resistance, something the bulls have failed to do over the past four months."
By Alex Kimani for Oilprice.com
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