The oil market is well aware that the main reasons why oil has risen by 25 percent over the past few months is the reduction in production from Saudi Arabia and Russia, global oil demand holding up better than which was feared and the decline in US shale oil activity.
That’s what Skandinaviska Enskilda Banken AB (SEB) chief commodity analyst Bjarne Schieldrop described in a new SEB report, which was sent to Rigzone on Tuesday. The big question, however, according to Schieldrop’s report, is how strong global oil demand is and how it will hold up, or even increase, in the coming quarters.
“Here the spread of estimates is still all over the place,” Schieldrop said in the report.
“For Q4-23 we have the following range of global oil demand estimates in million barrels per day 100.6, 101.8, 103.1, 103.2 and 104.7 from the major research providers of the oil market,” he added.
“This wide spread of estimates is mind-boggling … and surprising to both analysts and oil producers. It leads to a wide spread of estimates for the OPEC call. Some say the current market is in a deficit of 2-3 million barrels per day, while others estimate that the global oil market today is well balanced,” he continued.
In the report, Schieldrop noted that sanctions on Russian crude and oil product exports with import bans to the EU and the UK have led to a major reshaping of global oil market flows, “which, from again, it has created a fog through which it is difficult to assess the correct state of the world oil market”.
“We have previously argued that there may be a significant amount of ‘pent-up demand’ after the Covid-19 years with the potential for global oil demand to surprise on the upside compared to most demand forecasts,” Schieldrop said in the report.
“But there are also good reasons to be cautious about demand given the problems in the Chinese housing market and the highest interest rates in the United States since 2001,” he added.
“Uncertainty in global oil demand is clearly at the heart of Saudi Arabia’s production cuts since April this year,” Schieldrop continued.
“If it turns out that demand is actually stronger than Saudi Arabia fears, we should see an increase in Saudi production. Saudi Arabia, of course, could argue that yes, it is stronger than expected right now, but tomorrow could be worse. Also, the continued decline in the US oil rig count is a wild card for continued low Saudi output,” he said the analyst
Both crude oil and middle distillate (diesel, jet fuel, diesel) stocks are still significantly below normal and the global oil market is between a balanced, slight or large deficit, he said Schieldrop in the report.
“The global oil market is stressed as such due to low inventories and potentially a slight to large deficit at the top,” he said.
“The latter, however, can be undone by higher production from Saudi Arabia whenever it chooses,” he added.
Schieldrop noted in the report that the oil market remains in a very bullish state with stress on both crude and middle distillates.
“Speculators continue to enter the market, with net long positions in Brent and WTI crude increasing by 29 million barrels in the week to last Tuesday,” he said.
“Since the end of June it has gone from 330 million barrels to 637 million barrels. Long speculative positions are now at a 52-week high,” he added.
In a separate report sent to Rigzone on September 22, analysts at BofA Global Research noted that spot oil prices had risen more than 25 percent since June, “with Brent breaking through $95 a barrel. .. for the first time in 2023.”
“We believe this is helped by sustained OPEC+ production cuts in anticipation of more robust growth in global demand,” BofA Global Research analysts said in the report.
“Over the same time period, Europe’s energy sector has outperformed the stock market by around 10pp, with E&P so far outperforming Big Oils,” they added.
“In our view, this is because the pullback has sharpened across the range, suggesting that Big Oil can sustain relative outperform in a flattening Brent curve environment through 2024,” they continued.
In the report, BofA Global Research analysts said they believe Brent’s lag is due to OPEC+ voluntary cuts that increased excess capacity by about 30 percent to about four million barrels per day since July.
“But while we expect less demand growth in 2024 than OPEC (+1.1 million barrels per day vs. +2.2 million barrels per day), we believe more than 25 percent of capacity OPEC+’s current surplus will run out next year as Saudi Arabia and Russia ramp up supply,” BofA Global Research analysts added in the report.
“In our view, this will lead to a flattening of the shape of the Brent curve, which currently targets $87 per barrel in 2024 and $80 per barrel in 2025,” they stated.
In another report sent to Rigzone on September 19, Standard Chartered analysts projected that ICE Brent would average $98 per barrel in 2024 and $109 per barrel in 2025.
A report sent to Rigzone earlier this month revealed that BMI, a Fitch Solutions company, sees Brent oil prices averaging $83 a barrel in 2024 and 2025. A Bloomberg consensus included in that report projected that Brent would average $83 per barrel in 2024 and $81. per barrel in 2025.
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