The path of least resistance for oil prices is now to the upside.
That’s what analysts at Standard Chartered think, according to a new report sent to Rigzone on Tuesday afternoon, in which analysts said the unwinding of speculative duration appears to be complete. Analysts warned in the report that there could be a “rebuke of the lows” if the FOMC raises its policy rate by more than 25bps this week, but added that this is not their base-case expectation.
“The price of first-month Brent fell from a high of $86.75 per barrel on March 7 to a low of $70.12 per barrel on March 20,” the analysts said in the report.
“A general reduction in risk in asset markets initiated a relaxation of speculative oil duration; the pace of decline was then accelerated by the selling of trend-following funds and then by large selling by banks in response to gamma effects as prices approached a rally. of the producer puts around $70 a barrel for WTI and $75 a barrel for Brent,” the analysts added.
“As prices move off the lows and back toward the steeper part of the producer put curve, the gamma effects of last week should reverse, with banks buying back positions and strengthening the short-term rebound. Beyond that, we believe the key questions for traders will be whether fundamentals, OPEC policy and the strategic inventory policy of consuming countries are likely to change,” the analysts continued .
In the report, Standard Chartered analysts highlighted that they see a surplus at the start of the second quarter and a “modest deficit” for the rest of the year.
“There appear to be few useful parallels with the global financial crisis, when the surplus peaked above five million barrels per day in November 2008,” the analysts said in the report.
“We do not believe OPEC needs to cut in the near term, although we believe a post-FOMC signal from major producers about the need for less chaotic and less technically driven market behavior could help accelerate the stabilization of prices,” the analysts added.
Analysts at Standard Chartered noted in the report that its oil supply and demand balance “is relatively benign in terms of its price implications.”
“It doesn’t provide much fundamental support for the recent rally to $70 a barrel, but it also doesn’t support any sustained rise this year above $100 a barrel. Our balances include an increase in OPEC production at the end of the third quarter by 0.7 million bpd from current levels, with year-on-year demand from China forecast to grow by 678,000 bpd in 2023,” the analysts added.
Analysts at Standard Chartered revealed in the report that they expect Russian oil production to decline “a modest” 0.2 million barrels per day from its “already reduced” level in March by the end of the year, “a trajectory that would produce a year-over-year average Russian supply drop of 821,000 barrels per day”.
“We estimate that OPEC production averaged 29.09 MB/d in February, close to our Q2 OPEC crude forecast (29.0 million bpd), but for below OPEC’s second-quarter call (29.9 million bpd), providing some scope for a production increase sometime in the second half,” the analysts added.
The report showed that Standard Chartered expects Brent to average $91 per barrel in 2023, $98 per barrel in 2024 and $109 per barrel in 2025. WTI is expected to average $88 per barrel in 2023, $95 per barrel in 2024 and $106 per barrel. in 2025.
In quarterly terms, Brent is expected to average $90 per barrel in the second quarter, $88 per barrel in the third quarter, $93 per barrel in the fourth quarter, $92 per barrel in the first quarter of next year and $94 a barrel in the second quarter of 2024, according to the report. WTI is expected to average $87 per barrel in Q2, $85 per barrel in Q3, $91 per barrel in Q4, $89 per barrel in Q1 2024, and $91 per barrel in Q2 quarter of 2024, the report highlighted.
Standard Chartered’s annual and quarterly projections for Brent and WTI were exactly the same in a separate report the company sent to Rigzone in February.
Decade of underinvestment
By 2008/9, a decade of underinvestment had returned de facto control of oil markets to OPEC, and Saudi Arabia in particular, “which, after a $100 correction in the oil prices, stated that “$147 would destroy demand and $47 would destroy investment,” BofA Global Research said in a report sent to Rigzone late last week.
“What followed was a five-year period in which OPEC policy kept oil in the $100 range until the overcapitalization of the industry pushed the limits of Saudi tolerance for loss of market share to defend the price,” BofA Global Research added in the report.
“While its efforts to slow US shale growth failed in 2015, 2020 succeeded with Covid replacing the 1997 financial crisis as the window of opportunity to flex its low-cost advantage by flooding the market with unnecessary oil,” the company continued.
“Regaining control of the oil markets has been our characterization of OPEC+ (Saudi Arabia) policy ever since, with their self-described ‘regulatory’ role defining our view of ‘$80 as the new $60 dollars” perhaps drawing a line in the sand amid an uncertain. macro backdrop that puts the spotlight on demand uncertainty. But this is precisely the setting where OPEC intervention often carries the day to restore a some semblance of stability with the next JMMC meeting, possibly the next major test of this thesis,” BofA Global Research said.
The 47th Meeting of the Joint Ministerial Monitoring Committee (JMMC) took place via video conference on 1 February. At this meeting, the JMMC reaffirmed its commitment to the declaration of cooperation, which extends until the end of 2023 as agreed at the 33rd OPEC and non-OPEC Ministerial Meeting on October 5 2022.
“The committee reviewed crude oil production data for the months of November and December 2022 and noted the overall compliance of OPEC participating countries and non-members of the Declaration of Cooperation,” said a statement published on the site OPEC website.
“JMMC members reaffirmed their commitment to the DoC… and urged all participating countries to achieve full compliance and adhere to the compensation mechanism,” the statement added.
In October last year, OPEC revealed in a statement on its website that the OPEC+ group decided to cut production by two million barrels per day from August 2022 levels at its 33rd meeting. According to a production table accompanying this statement, Saudi Arabia and Russia will bear the brunt of this cut with 526,000 barrels per day each.
OPEC+ decided to keep production stable at its 34th meeting. The group’s next meeting is currently scheduled to take place in June.
To contact the author, please send an email andreas.exarcheas@rigzone.com
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