CRUDE IN SIGHT

Crude climbs amid Russia oil price cap talks, other supply concerns - June 28, 2022

  1. Crude futures were extending Monday’s gains early Tuesday in Asia as the market digested the implications of G7 leaders agreeing in principle, a proposal to cap Russian oil export prices and a news item Monday indicating that even the OPEC heavyweights of Saudi Arabia and the UAE are running out of readily available spare production capacity.
  2. The G7 leaders will explore the “feasibility” of introducing temporary price limits on how much buyers pay for Russian crude and refined products, according to a draft text drawn up at the end of their second day of summit in Germany on Monday.
  3. The UAE is pumping flat-out, while Saudi Arabia can only add about 150,000 b/d at most, French President Emmanuel Macron reportedly told US President Joe Biden privately at the G7 summit.

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OIL VIEWSLETTER

EU phase-out of Russian imports leaves crude nowhere to go but up - June 10, 2022

With its sixth package of sanctions against Moscow finally pushed through, the European Union is targeting a 90% reduction in imports of Russian crude and refined products by year-end. Combined with about 830,000 b/d of Russian oil already rejected or being phased out by the US and UK, it amounts to around 3.8 million b/d of supply that Moscow will have to place in markets outside Europe and the US. 

Those alternatives are mostly limited to China and India. And there are question marks over them -- How much more could these two countries absorb, what hurdles could the loss of European shipping insurance coverage pose for those flows, and what might be the impact of any Russian oil “price cap” that the US-EU combine might try to impose on other countries.

The supply scenario is in a state of flux but market players fear the current tightness will continue or even worsen in the weeks and months to come. The nub of the shortages is the festering war in Ukraine and Western sanctions against Russia, which have no end in sight yet.

Meanwhile, the market simply has no relief valves. OPEC+ is pumping nearly 2.8 million b/d below its target and won’t be able to close that gap meaningfully, its latest decision to accelerate the unwinding of the remaining output cuts notwithstanding. 

Parts of Shanghai and Beijing went under renewed Covid curbs on Thursday and Chinese oil demand remains muted. But it is already baked in. Despite its strict adherence to “zero-Covid”, the Chinese government may now avoid sweeping and stringent lockdowns, mindful of the drag they are causing on economic recovery.

US gasoline prices are setting new records, closing in on $5/gallon. Consumers are groaning under the weight of inflation running at 40-year highs. Yet, gasoline consumption in the week to June 3, which covered the Memorial Day Weekend, hit a year-to-date high of 9.2 million b/d. 

The demand for consumer goods through Covid is making way for the pent-up demand for travel – not only in the US, but the world over. 

At the same time, talk of recession and stagflation is growing louder by the day. In the face of stubborn inflation, the US Federal Reserve is poised to aggressively tighten monetary policy. Eurozone government borrowing costs rose to an eight-year high on Thursday after the European Central Bank said it would raise interest rates by 0.25% in July – its first hike since 2011. 

So, will inflation fuelled by high oil prices and a recession catalysed by monetary tightening pave the way for lower oil prices? It looks increasingly likely. But it would be a pity if that is the only way the world can find relief from a red-hot oil market.

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BULLS & BEARS

May 2022: Moderately bullish near-term, mildly bearish mid-Jun to mid-Jul - May 30, 2022

Brent futures had climbed to two-month highs on Monday, hovering around $120/barrel. A confluence of factors, mostly concerning supply, had stacked up on the bullish side.

The European Union is persisting in its efforts to agree a ban on Russian oil imports. After Hungary stymied an earlier plan to phase out all imports, the bloc has decided to target only seaborne shipments of crude and refined products from Russia. The proposal, which is part of the sixth EU sanctions package against Russia, is aimed at overcoming concerns of Hungary and other landlocked members of the bloc that are heavily dependent on crude flowing in through the Druzhba pipeline.

The EU embargo, if agreed, could double the estimated 1.5 million b/d of Russian oil locked out of the market so far. The EU leaders’ discussions this week could be difficult and drawn-out. But the fresh premium injected in crude is unlikely to fade unless the latest proposal is also abandoned for lack of consensus among the 27 member countries.

Further adding to the market’s supply worries, Kazakhstan’s giant Kashagan oil field has gone into a nearly two-and-a-half-month-long maintenance. Meanwhile, about half a million barrels of daily Libyan oil production remains shuttered due to blockades.

Geopolitical tensions in the Persian Gulf flared up last week, involving Iran, Greece and the US in a tit-for-tat arrest of oil tankers.

However, looking out into the horizon, we think the current bout of optimism over China easing Covid restrictions in Beijing and Shanghai may turn out to be premature. As we approach mid-year, the corrosive effect of an economic slowdown, stubborn inflation and weakening consumer sentiment could begin showing up in withering oil demand.

At the same time, the risk of a full-blown recession staring Russia and Europe in the face may help bring the opposing parties in the Ukraine war to the negotiating table. A face-saving retreat by all sides, which could be sold as victory at home, may be the most anyone could hope for and perhaps the only way for this war to end.

Keeping the above factors in view, our latest Bulls & Bears report concludes:

  • Moderately bullish sentiment for the near term 
  • Mildly bearish sentiment for mid-Jun to mid-Jul

The Moderately Bullish sentiment relates to crude remaining supported around current levels, with an upward bias.

The Mildly Bearish sentiment for mid-Jun to mid-Jul means up to 10% pullback in prices from current levels.