Rystad Energy has issued an oil market update in the aftermath of the OPEC+ meeting on 02 June. The decline in the price of prompt Brent can be attributed to apprehensions regarding the demand for gasoline and diesel triggered refinery run cuts. Rystad Energy’s signal is that the price could see an upturn towards the US$85 mark in the near future.
Rystad Energy's oil market update from Senior Vice President & Head of Oil Trading/Downstream Analysis, Mukesh Sahdev, is as follows:
“Brent crude futures are hovering below US$80 per barrel after dropping to the lowest level in four months after the OPEC+ announcement on 02 June. The market reaction has been a bearish bias to the extension of the cuts to the end of the third quarter. This is probably more driven by the bearishness on the product market side and the fear of a demand misfire triggering cuts in refinery runs cut and lower crude demand.”
“What the market is missing is that summer seasonal demand is still ahead, and it is too premature to conclude that it will turn out to be very lackluster. Our market update before the OPEC+ meeting, released on 31 May, provided the signal for extension to the third quarter of 2024 despite the temptation of projection of good growth in oil demand and refinery runs during that period. We also pointed out that OPEC+ is likely to keep an eye on the unexplained 1+ million bpd surplus in the balances thus far; bearish fourth-quarter fundamentals are unlikely to provide support to unwind cuts in the near term. The slow unwind forward guidance spread over 12 months from September 2024 to September 2025 is in line with Rystad Energy’s signal of OPEC+’s struggle and is not guaranteed. The note also pointed out the need to shift focus from crude to product markets.”
“Not only has the outright price level corrected, but there is also a significant and more worrying correction in time spreads from a OPEC+ strategy angle. Dubai time spreads till month four have dropped to the lowest levels near $0.50 per barrel from a high of $1.0 per barrel in early April. The correction in Brent time spreads is much higher, dropping from $1.0 per barrel in early April to near $0.20-$0.30 per barrel. NYMEX heating oil slipped into contango in mid-April and now Asia gasoline has done the same.
“Our latest estimates after the OPEC+ decision shows a deficit of 2.7 million bpd on average in third-quarter liquids balances, with a high of 3.2 million bpd in the peak month of September. Fourth-quarter liquids balances signal a deficit of 2 million bpd. However, the supply and demand balances on absolute reported levels may indicate a deficit but calculating the delta changes in fundamentals since pandemic low levels to now, the signal is that the sum total of crude runs and exports from OPEC+ is higher than production by 1.2 million bpd.”
“By applying a 50% uncertainty and adding 600 000 bpd of unexplained supply to the balances, the deficit projection shrinks to 2.1 million bpd in the third quarter of 2024 and to 1.4 million bpd in the fourth quarter. With respect to crude, third-quarter crude balances show deficits of 2.2 million bpd on average, with a high of 2.4 million bpd in the peak month of August. Fourth-quarter balances signal a deficit of 1 million bpd.”
“By adding 600 000 bpd of unexplained supply to the balances, the deficits in the third quarter are reduced to 1.6 million bpd and the deficit in the fourth quarter is crimped to 400 000 bpd. This unexplained supply increase is probably a function of the heavy cuts mandated by the group over time, but this will likely reduce as the unwinds start.”
“The development of pricing by factoring in the adjusted supply-demand balance, bond yields and risk premium, brings our latest price forecast for the third quarter to US$77 and to US$83 for the fourth quarter. Our previous pricing outlook indicated a higher price level without the unexplained surplus adjustment.”
“Apart from examining the impact of OPEC+ on global balances, the oil and crude demand profiles of key OPEC buyers suggest that the current bearishness is mispriced. Most OPEC+ exports are exposed to a limited number of key Asia-Pacific countries without significant diversification options.”
“However, the weighted refinery run profiles of buyers of key OPEC+ producer countries do signal stock draws, with rising runs and extended cuts keeping the crude market away from contango and a possible return to earlier backwardation levels. Summer is still ahead and we expect oil prices to find support from the lower levels in the prompt.”