StanChart Eyes “Strong Q3 Fundamentals” for Oil Price Rally

Standard Chartered has been plotting the path of the oil price rally in what it terms as an “incorrect market reaction to the 2 June OPEC+ meeting”, telling investors in a note on Wednesday that the rally has “significantly further to run”.

Since reaching a low point after June 2, Brent crude has rallied by over $9 per barrel, and analysts at Standard Chartered now believe that “with the Q3 supply deficit only partially mitigated by the start of OPEC+ production increases in Q4, we could be looking at a supply deficit beginning in August. 

“The increase in demand towards its seasonal peak is the key driver of supply deficits of over 2 million barrels per day in both August and September. We do not expect the market to swing back into surplus in Q4 despite the seasonal fall in demand and increases in OPEC+ output,” Standard Chartered said in an investor report. Analysts are assuming here that OPEC+ voluntary output cuts unwind as planned, but warn that if the market becomes more bearish, “we expect the rolling back of voluntary cuts to take place over a longer timeframe”. 

Standard Chartered is advising investors that the market has not yet priced in a continuation of inventory draws in the fourth-quarter of this year and the first quarter of next year, and sees the potential for $90 oil in early Q3.

Also on Wednesday, Ole Hansen, head of commodity strategy for Saxo, said analysts noted that since the Q4 2022, the U.S. crude oil benchmark, West Texas Intermediate (WTI) has been averaging around $79 per barrel, highlighting “how production restraint by OPEC+ since April last year has helped deliver a period of stable prices, most likely at lower levels than originally anticipated by the group.”

Hansen also noted that many cartel members need Brent to trade closer to $90 to balance their budgets. 

“From an investor perspective, the crude oil market continues to yield a better return than what the change in the spot price is indicating,” Hansen wrote, noting that WTI spot month futures were trading up around 14% year-to-date. Standard Chartered also noted that while oil’s rally is strong, SCORPIO, its machine-learning oil price model, sees some bearish short-term influencers, most notably three weeks of increasing oil prices against the backdrop of “unusually low implied volatility”.

By Tom Kool for Oilprice.com

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