Standard Chartered: Oil markets will soon face significant supply deficits | OilPrice.com

The large oil price selloff in the wake of OPEC+’s decision to reduce 2.2 million bbl/d in voluntary production cuts later this year has been corrected. The announcement sent first-month Brent falling to a four-month low below $77 a barrel (bbl), good for a sharp drop of $8/bbl from the previous weeks high and over $15/bbl lower from April’s YTD high. Thankfully, oil prices have largely pared losses with Brent for July delivery changing hands at $82.61 a barrel in Wednesday’s session, while the corresponding WTI contract was trading at $78.57.

Commodity analysts at Standard Chartered noted that the price drop was the result of a combination of several factors, including extreme macroeconomic pessimism, speculative shorts and over-enthusiastic algorithmic trading that failed more fundamental traders. Consequently, oil futures markets returned to a net short position in Brent, compared to a net long position at the end of last week. StanChart has reiterated its earlier assessment that not only could markets absorb additional barrels from OPEC+ producers, but that a deficit is likely to emerge in the latter part of the current year and carry over into 2025. Analysts have predicted a very large 1.9 million barrels per day (mb/d) deficit in Q3-2024.

On the demand side, StanChart has forecast growth of 1.68 mb/d in 2024 and 1.41 mb/d in 2025. StanCharts latest demand growth forecast is 0.3 mb/d higher in absolute terms and 0.14 mb/d higher in growth terms than its inception. expectations of the year. Commodity experts have come up with a breakdown of the supply pattern between Declaration of Cooperation (DoC) signatory countries (OPEC+) and non-DoC producers, with DoC crude oil production further split between OPEC and non-OPEC signatories. They have used very conservative assumptions about compliance improvements for the three main countries that have recently produced the above targets and assumed that they will only gradually converge to their respective targets. According to analysts, DoC production is forecast to be slightly lower in Q4-2024 than in Q2-2024, even in a near-worst-case scenario of a very slow return to compliance and limited output offset by the three countries in question . StanChart has predicted that the scale and duration of projected deficits suggest that market sentiment is likely to improve in the coming months.

Related: Oil declines build inventory

Source: Standard Chartered Research

Bearish Oil Futures

Oil futures traders have opened an unusually large speculative draw on Brent

In recent weeks, with the latest CFTC and ICEpositioning data revealing that the reduction in funds intensified following the June 2 OPEC+ meetings. The StanCharts proprietary money manager positioning index for ICE Brent fell 48.1 w/w to the maximum downside reading of -100.0, the first time it has done so since March 2020 at the start of the pandemic. Meanwhile, oil bulls have been completely out, with money managers net commodities in ICE Brent at just 1.51% of open interest, a record low in data since 2010. Net selling of the contract hit a record of high at 103.9 mb, 22.8 mb higher than any single week during the pandemic. Net sales over the past five weeks have reached a cumulative 273.3 mb, 52.5 mb more than the most intense five-week period of sales during the pandemic. The bearish activity in WTI crude oil has been less extreme than that of Brent. Net selling across the four main WTI and Brent contracts was 154.9 mb, consisting of a 90.7 mb increase in shorts and a 64.1 mb decrease in longs.

StanChart points out that there is no excuse to sell at a rate that exceeds even during the pandemic. On the bright side, analysts say there is room for significant upside in short-covering prices with currently oversold speculative shorts.

The situation could not be more different in the natural gas markets. Henry Hub gas prices have risen from a 3-year low of $1.61/MMBtu in April to $3.02/MMBtu currently, while European natural gas futures are up nearly 50% since from February to 35.8 per megawatt-hour. EU gas inventory build rate remains below average: according to Gas Intelligence Europe (GIE) data, EU inventories stood at 83.34 billion cubic meters (bcm) on June 9, good for building of steam/w of 1.58 bcm compared to the five-year average construction w/w of 2.72 mb for the same period and construction in recent years of 2.23 bcm. European gas inventories have now risen less than the five-year average on 52 of the past 55 days, pushing the build above the average to a six-month low of 13.77 bcm. The relatively slow inventory build is largely responsible for supporting the first monthly Dutch Title Transfer (TTF) gas above €30 per megawatt-hour (MWh).

By Alex Kimani for Oilprice.com

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