Bearish sentiments continue to overshadow the crude oil markets. Despite a small spike at the tail end, prices registered a back-to-back retreat last week.
Several factors are in play. The announcement of the release of 180 million barrels of crude from the United States Strategic Petroleum Reserves (SPR) over the next six months played a very significant role in dampening the overheated oil markets.
The announcement of the release of an additional 60 million barrels by the other members of the International Energy Agency helped amplify the impact of the U.S. move.
In the meantime, the U.S. central bank’s plans to trim its balance sheet and aggressively tighten the monetary policy to combat inflation also blunted demand for risk assets and boosted the dollar. That made commodities priced in U.S. dollars less attractive. And oil is priced in U.S. dollars.
In addition, China ordered a series of lockdowns in key urban centres, including Shanghai, to quell a COVID-19 outbreak. Because of the lockdown, China’s oil demand shed an estimated 1.2 million to 1.3 million barrels daily, according to data from energy consultancy FGE. So questions about global demand continue to haunt the markets.
But the war on Ukraine and the lack of available Russian crude are no longer as prevalent on the radar. While many Western countries are shunning Russian oil following the invasion, there are plenty of willing takers in Asia, especially China and India. Bloomberg News reported that cargoes of Russian Sokol crude to the Far East have sold out for next month.
But with the summer driving season arriving, how long will this bearish trend persist?
Analysts appear to be divided. A report by American journalist Larry Higgs says prices at the gas stations could rise further in the next few months.
Some say the relief we’re seeing could start fading as soon as April 15, when summer-blend gasoline starts replacing winter gas in gas station tanks.
“Those (summer) blends are more difficult to refine and complicated to distribute, increasing the price,” said Robert Sinclair, a AAA Northeast spokesman. “Warming weather leads to more folks heading out to shake off the COVID doldrums, leading to more driving and more demand for gasoline,” Sinclair was quoted as telling Higgs. “That leads to higher prices. Memorial Day (late May) is the start of the summer driving season, more demand, and definitely higher prices.”
How long this market manipulation can be sustained is open to debate. “There’s some concern that by artificially lowering prices, you are only going to increase demand and that’s going to burn off that supply pretty quickly,” Reuters reported, quoting Phil Flynn of Price Futures Group.
The release of reserves could also deter producers – including the Organization of the Petroleum Exporting Countries (OPEC) and U.S. shale producers – from accelerating output even with oil prices around US$100 a barrel, ANZ Research analysts said in a note.
“Despite these unprecedented volumes (from the reserves), doubts remain whether this incoming flood of supply will address the shortfall in Russian crude,” PVM analyst Stephen Brennock told Reuters.
Expect more oil price uncertainty in 2022 by Rashid Husain Syed
No one has a real handle on the market and its future direction
Investment bank JPMorgan Chase & Co. expects the release from the strategic reserves to “go a long way in the short term” to offset the one million barrels a day of Russian oil supply that it expects to remain permanently offline. “However, looking forward to 2023 and beyond, global producers will likely need to ramp up investment to both fill the Russia-sized gap in supply and restock the IEA strategic reserves,” the bank said in a note.
Analysts at investment banker Citigroup don’t seem to concur. The world will have more oil than is required, Tsvetana Paraskova of OilPrice.com reported, quoting Citigroup analysts.
“Even as Russian production slides and OPEC+ actually reduces total flows to markets, a slowdown in global growth is reducing oil demand growth, and the IEA release of 220 (240) million barrels of oil between now and October point to market weakness and inventory builds ahead,” Citigroup analyst Edward Morse said in a note carried by Proactive Investors.
So the crude oil market remains murky. Despite some short-term respite, the long-term outlook is cloudy. The downward price momentum may not continue for long.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.
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