While fears of a global recession are still very much alive and kicking, oil traders have been opening increasingly bullish positions in the belief that the selloff earlier this month was overdone.
Chart of the Week
- The spread between the world’s two leading crude benchmarks, Brent and WTI, is as wide as it has been in more than three years, moving as far as $8.50 per barrel recently.
- Previous strength in WTI has been tangibly beaten down by weakening gasoline demand and several consecutive stock builds.
- While Europe has plenty of its own demand problems, mostly consequences of Russia’s invasion of Ukraine, the strength in the prompt months is still there, with the 1-month ICE Brent spread surging to an all-time high of $5 per barrel today.
- US crude exports have seen a substantial drop compared to record highs seen in April-May, but the wide Brent-WTI spread will provide a huge boost to European buying of the American benchmark.
Market Movers
- With Chinese drillers moving into ever more sophisticated offshore projects, state-owned oil firm CNOOC (HKG:0883) has opened bidding for 13 blocks in the South China Sea, actively seeking foreign participation in China’s upstream industry.
- Despite Trafigura leaving the project earlier this month, Russian state-controlled company Rosneft (MCX:ROSN) started construction of the 600,000 b/d capacity Vostok Oil terminal in the Arctic zone, expected to start operations in late 2024.
- UK energy major Shell (LON:SHEL) made a final investment decision on the Jackdaw gas field, initially rejected by British authorities, and now expects to reach 40,000 boe/d of peak gas production by the mid-2020s.
Tuesday, July 26, 2022
For the second straight week, the main oil futures contracts have seen a marked rejuvenation in open interest, primarily coming from bullish long positions. This suggests that, despite ongoing fears of an economic recession, traders believe that the selloff earlier this month was overdone. This has also translated into the markets largely ignoring the return of Libyan oil. In addition, Europe’s natural gas woes have strengthened demand prospects for middle distillates, with diesel switching in the winter months now a very real possibility. With the Brent-WTI spread as wide as ever, ICE Brent has been flirting with the $107 per barrel mark in today’s trading session.
Gazprom Squeezes Gas Supply Even Further. Russia’s Gazprom (MCX:GAZP) squeezed pipeline gas supply to Europe even further this week, with Nord Stream 1 flows dropping to 33 Mcm per day as the Russian firm argued that it needed to halt the operation of yet another gas turbine at a compressor station.
OPEC+ Compliance Drops to Lowest in Years. Proving that OPEC+ has been facing difficulties in ramping up new production capacity, the oil group’s underproduction rose to a whopping 2.84 million b/d in June, bringing the overall compliance rate to a staggering 320%.
EU Ministers Oppose Gas Cut Mandates. The European Commission is seeking to push through a plan that would require each EU member state to cut their gas use by 15% from August 2022 to March 2023, but opposition from France, Italy, and others will see it softened to voluntary participation.
Libyan Production Is Back on Track. Less than one week after the Tripoli government lifted the blockade of oil ports and infrastructure, production rates in the country have surged above 1 million b/d, almost doubling month-on-month.
US LNG to Europe Still Going Strong. When President Biden vowed to provide European buyers with an additional 15 bcm of LNG this year, the pledge was met with skepticism, but in H1 this year the US sent more than it did in all twelve months of 2021 (39 bcm vs 34 bcm), getting within touching distance of fulfilling the pledge.
Guyana Launches New Licensing Round. With one single Exxon (NYSE:XOM) operated block already wielding 11 billion of oil reserves, the President of Guyana has called on US companies to participate in the upcoming Q3 auction, seeking to avoid dependence on one dominant consortium.
Mexico Maximizes Fuel Oil Exports to the US. Exports of Mexican fuel oil to the United States rose to the highest level on record in H1 2022, averaging 5.3 million barrels a month, as higher residue output has been met with increased US demand, seeking to replace sanctioned Russian volumes.
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Gasoline Cracks Plummet Amid Oversupply Fears. Gasoline cracks across the world have fallen by more than 100% over the course of July, with Asian margins dropping to a marginal discount to Brent after hitting a premium of $38 per barrel earlier, with oversupply leading to high stock builds recently.
Germany’s Coal Sector Runs into Resource Availability Issues. Coal operators in Germany have run into a series of difficulties in bringing back idled coal plants, coming from low coal availability and aged production units. So far it appears that only one coal plant of the 16 that were planned has been reconnected.
US Energy Authorities Assist GM Battery JV. The US Energy Department announced it would loan $2.5 billion to a joint venture of General Motors (NYSE:GM) and LG Energy Solution (KRX:373220) to finance lithium-ion battery cell manufacturing facilities in Ohio, Tennessee, and Michigan.
Algeria Records Further Two Oil and Gas Discoveries. Italian oil and gas major ENI (NYSE:E) has made another two oil and gas discoveries in Algeria’s gas-rich Berkine basin, working in a JV between ENI and Sonatrach, only four months after it had reported two significant finds in the same region.
Europe Greenlights Third Party Russia Deals. Brussels has tweaked its Russia sanctions regime, allowing European countries dealing with Russian state-owned companies Rosneft and Gazprom to buy and ship oil to third countries provided they do not reach EU destinations.
US Shale Firms Complain of Growth Headwinds. According to a recent survey by the US Federal Reserve Bank of Dallas, almost all oil and gas executives believe the ongoing supply chain delays are having a material impact on new projects, primarily focusing on shortages of labor and soaring equipment costs.
By Tom Kool for Oilprice.com
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That is why crude oil prices are headed in an upward trajectory for at least the next five years and probably beyond until global investments in oil production capacity expansion reach their fruition.
Daily global oil consumption this year has already exceeded the 2019 level of 101.16 million barrels a day (mbd) and is projected to surge beyond $103.0 mbd in 2023. Moreover, Brent crude could be expected to range from $108-$115 a barrel even touching $120 before the end of the year.
And while a recession in normal circumstances does indeed lead to a shrinking of the economy and demand destruction. We are in very unusual circumstances of shrinking global capacity and tightness in the market. In such circumstances, recession could hardly lead to demand destruction since there is hardly enough supply to destroy. So we end up with a unique form of recession where demand and prices continue to surge and the global economy continues to shrink.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert