The rise in the price of oil to $80 shows that the long-awaited tightening of the market is imminent Ship’s crew

By Grant Smith

July 16, 2023 (Bloomberg) — Betting on a tighter oil market has been a bad trade for most of this year. But there are signs that it’s finally paying off.

After months of stagnation, crude oil prices surged above $80 a barrel in London last week as fuel demand in China and elsewhere recovers from the pandemic and hits new highs. This comes at a time when production cuts by Saudi Arabia and its OPEC+ allies will quickly drain storage tanks around the world.

“We expect a strong tightening in the market,” Toril Bosoni, head of oil markets at the International Energy Agency in Paris, said in an interview with Bloomberg Television. “With demand increasing seasonally, we believe there is a risk that prices will continue to rise into the third quarter.”

That would not only reward bullish traders, but also boost energy producers from Texas to Moscow. It would also jeopardize the global economy, which has recently benefited from falling fuel costs and a slowdown in inflation, and affect the fortunes of political leaders – from President Joe Biden’s re-election to Vladimir Putin’s war in Ukraine.

It’s far from clear if Brent crude’s return to $80 a barrel is a tipping point heralding a major price rally. Economic storm clouds continue to darken the horizon, from shaky Chinese indicators to rising interest rates, and barrels of cheap crude oil continue to pour out of Iran and Russia.

But at least the market seems to have found a bottom.

Oil watchers have spent the first half of the year lowering their price expectations. Facing weak economic growth, they abandoned initial calls for a return to $100 a barrel, despite Saudi Arabia’s repeated attempts to manipulate prices through production.

But analysts stuck to the view that the next six months would produce a stronger market, and last week the pieces started to fall into place. Brent futures, the main international benchmark, rose to their highest level since May.

“This is the turning point that the market was expecting,” said Jorge Leon, senior vice president of oil market research at consultancy Rystad Energy A/S. “It looks like the beginning of the hot summer in the crude oil market.”

OPEC+ cuts

The crisis comes as production cuts implemented by the Saudis and other members of the Organization of Petroleum Exporting Countries are finally taking effect.

In the cargo market, price differentials are increasing for grades of crude chemically similar to those shipped from Riyadh. The kingdom gave markets a further boost last week by announcing that the additional unilateral cut of 1 million barrels a day implemented this month would continue into August.

Even Russia, after a long delay, seems to play a role. For much of this year, Moscow increased crude oil exports and maximized sales to fund its war in Ukraine, even as it promised to curb production. Tanker tracking data compiled by Bloomberg shows that the country reduced its exports by about 25% in the four weeks ended July 9.

According to Standard Chartered Plc, the balance between supply and demand swung from surplus to deficit as early as June. The deficit will more than double in the coming months, depleting oil inventories by a whopping 2.8 million barrels a day in August, the bank estimates.

“All the microfundamentals are finally turning bullish,” said Trevor Woods, chief investment officer at commodities hedge fund Northern Trace Capital LLC. “I mean, those draws are going to be huge.”

skeptical banks

Many oil traders are still skeptical about the prospects for a price hike.

Demand remains at the mercy of an uncertain economic environment, ranging from a slowdown in Chinese manufacturing to sluggish growth in Europe and fears that rising US interest rates could trigger a recession. Last week, the IEA lowered its forecasts for global fuel consumption this year.

On the supply side, production is increasing from the US to Brazil and Guyana. Even within OPEC+, members like Iran and Venezuela, which are exempt from production cuts, are increasing their oil sales. According to the consultant Kpler Ltd. Tehran’s exports have reached their highest level in five years.

Some of the Wall Street forecasters who once forecast $100 crude oil are clouding their outlook. JPMorgan Chase & Co. claims that OPEC+ will have to continue cutting production while Morgan Stanley expects the market to return to surplus next year.

“A lot depends on demand,” said Martijn Rats, Morgan Stanley’s London-based global oil strategist. “But the supply appears to be in place to cover it.”

Nevertheless, many market observers see considerable upside potential. And, of course, on this side is the most powerful player in the oil market.

Saudi Arabia, which needs substantial oil revenues to fund Crown Prince Mohammed bin Salman’s plans for economic and social transformation, has said it will do whatever it takes to keep the oil market in balance and could extend its voluntary cuts further .

“Barring an abrupt macroeconomic slowdown, the stars are pointing towards a sharp rise in crude oil prices to $90 a barrel,” said Bob McNally, president of Washington-based consulting firm Rapidan Energy Group and a former White House official.

–With support from Francine Lacqua, Devika Krishna Kumar, Sharon Cho and Alex Longley.

© 2023 Bloomberg LP

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