Inflation concern. Rate hike fears. These have been the drivers of oil market moves for months now. Demand and supply have largely remained ignored. But this may be about to change.
“This is in a year where there [are] economic headwinds, where there [are] recessionary signs everywhere ... China’s still picking up,” the chief executive of Aramco acknowledged earlier this week, but added, speaking to CNBC, that he was optimistic for the future.
The reason Amin Nasser was optimistic was, once again, China’s recovery. In fact, China’s recovery in the fuel use department has been quite robust. Demand for oil hit a record earlier this year and is likely to remain strong throughout 2023. Ignoring this fact to focus on factory activity does not mean it would go away.
It’s not just the CEO of Aramco, either. Energy Aspects’ Amrita Sen this week noted an overlooked aspect of the central banks’ rush to tame inflation—the same rush that has kept oil prices depressed for much of the year. And that overlooked aspect could have a bullish effect on prices later in the year.
It’s all about the cost of money, Sen wrote in an op-ed for the Financial Times. When central bankers hike rates, borrowing costs increase. And oil traders keeping millions of barrels in storage become unhappy. To fix this, they are beginning to sell this oil to reduce their costs. And that means there is less oil in global storage.
Sen reported that, per Energy Aspects calculations, the world has just 22 days of oil demand covered with oil in storage. That’s three days below the average for 2010-2019, she noted, and about to fall further by the year’s end.
Incidentally, global air travel is rebounding, and it is rebounding especially strongly in China, per a fresh report from the International Air Travel Association.
The IATA this week reported a 130.4% increase in revenue passenger kilometers in the Asia-Pacific for May, which was by far the biggest increase in air travel in the world. Traffic in the region shot up by 156.7%.
The figures were similar for China specifically, while every other big market—regional and national—saw much lower increases in air travel. It’s worth noting that all regions saw double-digit annual increases in air travel, meaning a solid increase in jet fuel demand, too.
No wonder, then, that despite day-to-day oil price movements, Saudi Arabia’s Energy Minister remains bullish. The kingdom earlier this week announced an extension of its voluntary production cut of 1 million bpd for another month and possibly longer. On the heels of this announcement came one from Russia, which said it would cut exports by half a million barrels daily from August.
Prices did not rise in any meaningful way following the news, which gave some commentators reason to argue that the output cuts were in fact bearish news for the oil market. These cuts, Reuters’ Clyde Russell wrote in a recent column, suggested that demand is falling short of expectations.
Yet OPEC is either putting up a brave face, or its members are watching more than China’s factory activity. At this week’s OPEC conference in Vienna, unnamed sources close to the group told Reuters its outlook for oil demand remained quite positive.
OPEC is later this month publishing its first outlook for 2024, and, according to the people who spoke to Reuters, it would feature a bullish view on demand. It would be lower than this year’s demand growth rate, but that has been extra-strong as the world exits two years of lockdowns.
Indeed, even the International Energy Agency said in its June Oil Market Report that “Global oil demand continues to defy the challenging macroeconomic climate and is set to rise by 2.4 mb/d in 2023, outpacing last year’s 2.3 mb/d increase as well as earlier expectations.”
It is this divorce between what oil traders are watching and what is actually happening with oil demand that is keeping oil prices depressed. And it is this divorce that can come crashing down in the second half of the year amid tighter supply, including from all-time production growth champion U.S.
There is one way that prices could remain depressed, however. In fact, they could even fall further—if a large part of the world slides into a recession despite all the efforts central banks have made and are still making, whatever the pain to businesses and consumers.
Indeed, in no random irony, it could be the central bank’s monetary tightening efforts that could cause a recession in a classic case of a cure being worse than the disease. Oil traders destocking is one instance of this. Another is lower consumer spending as prices rise due to higher borrowing costs for the companies that produce them.
Recession fears are bound to linger, weighing on oil prices, for the remainder of the year at least. At the same time, signs of a physical tightening of the oil supply will sooner or later reach the attention of traders, and they will react accordingly, prompting a price rebound.
By Irina Slav for Oilprice.com
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