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Standard Chartered Sees Oversupplied Gas Markets, Tightening Oil

Last year, the month of January recorded an oil mega-surplus of 3.4 mb/d, the third biggest surplus in the first month of the year over the past two decades. January is a seasonally slow month for oil markets due to weak demand. The entire first quarter of 2023 saw oil markets oversupplied with global oil inventories growing by 151 million barrels. Thankfully for the oil bulls, market fundamentals have kicked off the new year on a high note. 

Commodity experts at Standard Chartered estimate that last month's oil demand clocked in at 99.939mb/d, just 61 thousand barrels per day (kb/d) short of 100mb/d. Oil markets even managed to post a small surplus to the tune of 10 kb/d, marking only the third January surplus in 20 years. StanChart has predicted an inventory draw of 99mb in Q1-2024, with the relative y/y swing from surplus to deficit coming in at 250 mb or 2.7 mb/d.

Unfortunately, oil markets have been rather slow to react to tightening fundamentals despite the twin tailwinds of the strong improvement in overall balances as well as strong OPEC+ compliance with voluntary cuts and quotas. 

Brent futures for March delivery have gained 8.3% so far this month to trade at $83.75 per barrel, still some distance away from the $90+ fair value by StanChart. The recent pattern has been a slow upward trend as oil prices powered through a series of strong technical resistance levels, coupled with large rapid intra-day movements that the experts believe is the work of algorithmic traders. 

Many of the more fundamentally driven funds remain on the sidelines thus giving greater sway to algorithmic trading. The experts have argued that whereas physical traders appear increasingly convinced of the underlying strength of the oil markets,  financial traders are not yet buying the bullish thesis due to a variety of potential headwinds including top-down concerns based on the economic outlook and potential currency movements.  Related: Shell Backs Out Of Yet Another Floating Offshore Wind Project

After a sharp fall in the final months of 2023 due to falling interest rates, the dollar has been steadily gaining against the major world currencies in the current year after interest rates reversed course thanks to the Fed signaling it will cut rates by a smaller-than-expected margin. 

Last month, at the Federal Reserve's January policy meeting, the Fed kept rates unchanged at a range of 5.25 to 5.5% and reiterated that policymakers expect to cut rates only three times this year. Prior to the meeting, the market had been pricing in as many as five cuts in the current year and even seven cuts just a few months earlier.

Higher interest rates correlate with a stronger dollar, which acts as a headwind for oil and commodity prices.

Oversupplied gas markets

Source: Standard Chartered Research

Unfortunately, the same cannot be said for natural gas markets. Two years since Russia invaded Ukraine, Europe's gas supply security has grown significantly more robust. EU gas inventories remain on track to finish the withdrawal season at a record high, setting the scene for a summer of low prices. 

Gas markets tightened considerably in mid-January when a cold snap pushed weekly draws above six billion cubic meters (bcm), narrowing the surplus above the five-year average. However, this tightening was only short-lived, and inventories have since climbed against the five-year average on 30 of the past 31 days while weekly draws have fallen below 1.7 bcm. 

StanChart has forecast that Europe's gas inventories will set a new record of at least 67.5 bcm by the end of the current withdrawal season, above the previous record at 63.9 bcm. That's more than twice the 29.1 bcm inventory level recorded at the end- of the withdrawal season in 2022, shortly after Russia invaded Ukraine. 

Not surprisingly, Dutch Title Transfer Facility (TTF) prices are 68% lower than they were at that period and a full 93% lower than the August 2022 peak. Many experts have predicted that high inventory levels in the pivotal European market will keep global prices depressed, with the upshot being that low prices might allow some lost demand to return.

StanChart has noted that whereas a diversification of sources has played a key role in improving Europe's supply security, weak demand has also played a part in rising inventories. According to  StanChart's calculations, EU gas demand for the first 16 days of February came in 12.4% lower y/y and 18.4% lower than in February 2022. The analysts have warned that there's been some permanent demand destruction with demand unlikely to return no matter how low prices fall due to some industrial capacity shutting down, shifting to other regions or switching to other feedstocks.

By Alex Kimani for

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Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for  More