As oil prices continue to plunge, with the latest selloff triggered by a surprise crude build and another release from the Strategic Petroleum Reserve, commodity analysts at Standard Chartered say the oil market is not fundamentally broken but is rather merely responding to a surplus.
In its latest commodities market update on Thursday, StanChart says that the global oil market is currently in excess supply, with the U.S. transferring an average 0.83 million barrels per day (mb/d) into commercial inventories in the third quarter.
StanChart analysts estimate the Q3 surplus at 1.82 million barrels per day, and suggest that forecasts–notably from U.S. investment banks–that were indicating the potential for $150 oil were wrong and that the market “has not yet fully priced in the extent to which that assumption proved wrong”.
While forecasters have blamed market mechanism failures, volatility, trader irrationality and low liquidity for the recent plunge in oil prices, Standard Chartered analysts say the market is “well-functioning” and the simple answer is a “sharp swing into surplus”.
Now, “with a large global flow surplus and those transfers available to rebuild inventories, US oil data has been mainly bearish in Q3,” Standard Chartered writes, adding that “The latest Energy Information Administration (EIA) release continues that trend, with our US oil data bull-bear falling 8.3 w/w to a highly bearish -70.0.”
Standard Chartered described early indications of September demand as “weak”, noting that “demand for all products is lower y/y except other oils. The distillate data was particularly weak, with a sharp 4.22mb inventory build and the lowest implied demand in 20 months.”
By Alex Kimani for Oilprice.com
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The global oil market is merely reacting to concerns about COVID lockdowns in China. These will soon ease and both oil demand and prices will soon resume their surge.
I am still of the opinion that Brent crude could still surge to $110-115 a barrel before the end of the year particularly if G7 leaders go ahead with their proposed cap of Russian crude oil prices.
The stupid price cap is doomed to fail since President Putin can kill it anytime with a scratch of a pen. He could halt all exports to countries imposing the cap thus sending prices to the stratosphere.
Russia is neither short of buyers nor of markets or tankers to ship its crude and its revenues will continue to soar thus torpedoing the motivation behind the price cap.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert