The oil markets were slow to react to obviously bullish catalysts such as supply cuts, falling inventories and growing demand when they first kicked in about three months ago. Indeed, it appeared that the bears were about to overrun the markets, with bearish positioning in the oil futures markets recently sinking to the extremes they last did during the 2009 financial crisis.
However, just as Saudi Energy Minister Abdulaziz bin Salman had warned speculators of an impending short squeeze, the oil markets have turned around and the ongoing rally has gathered serious momentum: Front-month Brent has rallied by more than $14 per barrel since sinking to a 3-month low of $71.57/bbl on 28 June. September Brent has climbed to $85.80/bbl, the highest level since April 17. The settlement price and intra-day high have moved higher in 17 days of the last 24 trading days while the intra-day low has risen on 18 days.
Meanwhile, the oil price rally has been accompanied by a decrease in volatility, with the 30-day annualized Brent volatility standing at 25.2% at settlement on 31 July, the lowest level since 24 February 2022, the day Russia invaded Ukraine.
The good news for the bulls: many commodity analysts are confident that the oil price rally has enough steam to continue running. Standard Chartered analysts have forecast that the largest global supply deficits this year will be in August and September, with deficits likely to continue till the first quarter of 2024. StanChart’s demand model projects a supply deficit of 2.81 million barrels per day in August; 2.43 mb/d in September and more than 2mb/d in November and December. The analysts have also projected that global inventories will fall by 310 mb by end-2023 and another 94 mb in the first quarter of 2024 thus keeping oil markets backwardated and pushing oil prices higher. According to the experts, Brent price will remain unchanged at USD 88/bbl for Q3 2024 but will climb to $93/bbl for Q4. Demand will hit an all-time high in the current month, set fresh highs in December 2023 and again in February, March, June and August 2024. However, they have forecast that global oil demand will fall to a seasonal low of 99.33 mb/d in January 2024, the only month in the current decade when demand is expected to plunge below 100 mb/d.
The International Energy Agency (IEA) in Paris has predicted an oil shortage of about 1.7 million barrels a day during the second half of the year.
Saudi Arabia Likely To Extend Oil Production Cuts
Another bullish catalyst: Saudi Arabia is expected to prolong its voluntary 1 million-barrel oil supply cut into September as it seeks to support the rebound in oil prices. The top OPEC producer introduced the additional cutback this month in a bid to support higher oil prices amid faltering demand. Six participants in a Bloomberg survey have predicted the Saudis will taper off their extra cut by restoring 250,000-500,000 barrels a day of halted production in September.
“There’s ample evidence for Saudi Arabia to start unwinding the cuts in September. The market is screaming out for these barrels, and refiners are scrambling to get hold of them,”James Davis, director of short-term global oil services at consultants FGE, has told Bloomberg
The production cuts appear to have worked, with oil prices climbing about 12% in the past month to about $83 a barrel. Still, current oil prices might be too low for Saudi Arabia since it needs $100-a-barrel crude to balance its books.
“The kingdom will want to see a protracted rise toward $90 a barrel and possibly improvement in Chinese economic data to start considering putting the 1 million barrels per day back into the market,” Tamas Varga, an analyst at brokers PVM Oil Associates Ltd. in London, has told Bloomberg.
Nevertheless, oil markets are expected to gradually tighten, which should boost prices as the months roll on.
Overall, crude and natural gas inventories have been moving in opposite directions, with crude inventories falling while those of natural gas have been increasing. Excess gas inventories in Europe and the U.S. remain the biggest bearish catalyst that’s capping gas prices, and it will take an extraordinarily black swan event for the situation to turn around.