After an initial dip, the oil price rally has been a steady grind upwards in the current year, with the last 12 trading days seeing 10 days of higher intraday highs and 11 days of higher intraday lows. Brent is currently trading at $87.50 per barrel (as of Jan 26 at 12:24p.m. EST)--more than $10 from this year’s low. And now commodity analysts at Standard Chartered are saying that positive speculative sentiment in the oil markets can support prices above $90/bbl.
According to the experts, their proprietary crude oil money-manager positioning index increased by 23.2 w/w to -39.6, the largest w/w improvement since the price lows of April 2020. StanChart says that improving sentiment can be chalked up to trader consensus becoming less concerned about OECD recession and more convinced that the oil markets will see significant demand growth, from China and India in particular. The analysts say that the rally is likely to take Brent prices past $90/bbl, though they are not optimistic that the fundamentals are strong enough to sustain prices above USD 100/bbl.
Other market indicators have mostly been positive. Implied demand for total oil products increased by 2.687 million barrels per day (mb/d) w/w, the largest weekly rise in demand since December 2021. The big jump in demand came hot on the heels of weeks of depressed demand. Implied gasoline demand increased by 496 thousand barrels per day (kb/d) w/w; distillates by 203kb/d and jet fuel by 91kb/d. Total US refinery runs increased by 0.202mb/d w/w to 14.853mb/d but remain 1.4mb/d lower than the five-year average.
However, crude oil stocks rose to an 18-month high of 448.02mb, rising by 9.85mb against the five-year average and 8.41mb in absolute terms. The cumulative increase in crude oil inventories over the past two weeks is 27.37mb, 12.3mb above the five-year average. Crude stocks at Cushing, Oklahoma increased by 3.646mb w/w; the largest weekly increase since April 2020, as refinery turnaround season continues.
Oil Demand To Continue Growing
Perhaps the best news for long-term investors is that oil demand is unlikely to taper off any time soon.
A couple of years ago, European oil and gas supermajor BP Plc. (NYSE: BP) dramatically declared that the world was already past Peak Oil demand. In the company’s 2020 Energy Outlook, chief executive Bernard Looney pledged that BP would increase its renewables spending twentyfold to $5 billion a year by 2030 and “... not enter any new countries for oil and gas exploration.”
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Meanwhile, its European peer Shell Plc (NYSE: SHEL) said that its oil production will decline by 18% by 2030 as the world shifts to renewable energy. When many analysts talk about Peak Oil, they are usually referring to that point in time when global oil demand enters a phase of terminal and irreversible decline.
But it's becoming increasingly clear that these European energy giants were premature with their dire predictions, with black swan events such as the Covid-19 pandemic and Russia’s war in Ukraine blindsiding them. Energy experts at Energy Intelligence Group have predicted that not only will oil demand grow in 2023 but it will continue doing so till the end of the decade.
According to the analyst, global oil demand will grow to 101.2 million barrels per day in the current year and will continue growing to hit 106 mb/d by 2030. Global oil demand will grow by 1.5 mb/d in 2023, with China accounting for 650,000 b/d after the country abandoned its rigorous zero-Covid policy. Indeed, this year’s average will top the previous high of 100.6 mb/d set in 2019.
While this is great news for the oil bulls, the expert says that growth will primarily be driven by petrochemicals rather than transport fuels, and has also said that its base case is a plateau rather than a decline. Actually, Energy Intelligence is not the only bull here. OPEC, Exxon Mobil (NYSE: XOM) and the Energy Information Administration (EIA), have all predicted that global oil demand will actually grow as we go along and not shrink as many analysts have forecast.
Some of the biggest beneficiaries of growing oil demand will be oilfield services companies. Benchmark's Kurt Hallead says Schlumberger Ltd (NYSE: SLB) and its peer Halliburton Company (NYSE: HAL) are set to benefit in the intermediate term from increased exploration and production spending on international and offshore projects, and become leaders in the energy transition in the long term.
The analyst has launched coverage with Buy ratings with respective $65 and $50 price targets, good for 13.3% and 22.9% upside, respectively. Schlumberger has impressed after reporting fourth-quarter revenue of $7.9 billion, good for a 5% sequential increase and 27% year on year. Fourth-quarter GAAP EPS of $0.74 increased 17% sequentially and 76% year on year while EPS, excluding charges and credits, of $0.71 increased 13% sequentially and 73% year on year.
The consensus for the company was for earnings to grow 66% to 68 cents per share and revenue to increase 25% to $7.81 billion. SLB CEO Olivier Le Peuch said that revenue grew across all its business divisions and geographical areas and also added there was "robust" year-end sales in the company’s digital services.
By Alex Kimani for Oilprice.com
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These fundamentals namely a robust global oil demand, a tight market and a shrinking global spare production capacity have never been stronger since the oil price collapse in 2014. If they have managed then to take Brent crude to $147 even without the shrinking capacity factor, why can’t they take it to $100 and with the production capacity continuing to shrink. The return of China to the global oil market will give these fundamentals a further impetus.
According to OPEC+ which is one of the world's best assessor of the global oil market. global demand is projected to rise in 2023 by 2.5 million barrels a day (mbd) from 101.3 mbd in 2022 to 103.8 this year.
This and China’s return to the global oil market will ensure that Brent crude could rise to $100 a barrel or even higher either in the first or the second quarter of 2023.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert