CRUDE IN SIGHT

Crude eases early Tue as economic worries return to the fore - May 24, 2022

  • Crude futures were softer early Tuesday in Asia because with no major fresh developments in the ongoing energy war between the European Union and Russia, global growth worries that have been roiling the broader financial markets over the past few weeks shuffled to the centre-stage for the oil complex.
  • US President Joe Biden met with Asian leaders in Japan on Tuesday and unveiled the Indo-Pacific Economic Framework. However, any verbal agreements or contents of discussions on a proposed oil price cap on Russia as a collaborative effort by the West and Asian buyers were conspicuously missing from the headlines out of Tokyo.

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OIL VIEWSLETTER

Crude turns flattish as fears over Russian supply temporarily abate - May 20, 2022

Benchmark crude prices were poised for a moderate weekly gain Friday, but within the week itself, they became relatively range-bound. Brent futures hovered in the $109-114 range. 

From a bird’s-eye view, there were two notable developments:

  • Crude’s upward momentum stalled when it became apparent that the European Union was unlikely to be able to cobble together a consensus among its 27 members to agree to phase out Russian oil imports by the end of this year. Prices also lost some latent support from the European gas markets, as the ruble payments standoff was quietly defused and benchmark gas prices in the continent cooled off (you might recall this is exactly what he had consistently projected in the Viewsletter in recent weeks, reasoning that the gas trade was too critical for both sides to allow it to collapse). 
  • On the demand side, tentative bullishness from news that Shanghai had begun relaxing its Covid curbs and was preparing to phase out the weeks-long city-wide lockdown through June was hard to sustain. The Chinese financial hub reported its first Covid cases outside the quarantine centres in six days, raising doubts over whether it would be able to proceed with the reopening, which has been very guarded so far, in any case. Meanwhile, many other parts of the country, including Beijing, remain under restrictions due to rising cases. We expect China’s zero-tolerance policy towards Covid infections could keep economic activity in the country hobbled in the coming months.

Though the upward thrust on crude from the prospect of an EU oil ban or Russia cutting off gas supplies  has eased, the bloc remains under pressure to find a way to squeeze Russia’s oil revenues. A proposal to implement a price cap on Russian oil by mutual agreement between all buyer countries began crystallising between the US and the EU this week and will be one to watch closely, though we just cannot see how or why China and India will agree to it.

Also in this issue, we share our views and prognosis over a sharp contraction in the WTI/Brent spread in recent days.

 

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BULLS & BEARS

Apr 2022: Mildly bullish near-term, mildly bearish H2 May-Jun - April 29, 2022

Our latest Bulls & Bears report concludes:

  • Mildly bullish sentiment for the near term 
  • Mildly bearish sentiment for H2 May-Jun

The Mildly Bullish sentiment means a little more headroom for crude – up to 3% gains above today’s levels - over the next several days as the Russian oil and gas supply issues fester. Much of the disruptions in Russian oil trade observed this week and described above have been already priced in, as also some fear over more gas supply halts. We expect the EU to find a compromise solution to Moscow’s demand for gas payment in rubles. It may also agree a gradual phase-out of Russian oil imports, a considerably watered-down measure compared with an outright ban.

The Mildly Bearish sentiment for the second-half May and June corresponds to a 5-8% retreat in prices from current levels. It assumes the threat of an EU embargo on Russian oil and the dispute over ruble payments for gas will have been settled by then. Rosneft may be forced to drop its rubles and pre-payment conditions to clear out May and June crude cargoes. As the grip of supply fears weakens, market attention will turn to the storm clouds gathering over the global economy and oil demand.

In both forecasts, continued high price volatility is guaranteed, with price swings continuing to be exacerbated by thin trading volumes.

 

 

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EXECUTIVE BRIEFING NOTES

Prospect of IRAN deal becomes an unlikely cap on crude's rally - Oct. 29, 2021

The administration of ultraconservative Iranian president Ebrahim Raisi agreed to return to the negotiating table with the world powers this week in an effort to revive the 2015 nuclear deal, triggering a hasty sell-off in crude.

Talks are expected to start by the end of November and given their difficult nature and the hurdles that forced a stalemate in the last round of negotiations this summer, could take a few months to deliver an agreement, if they are to produce one at all. 

As a result, any supply hike from Iran will not come in time to relieve the upward pressure on crude from bulls betting on a worsening coal and gas crunch this winter.

Also, the US is unlikely to lift all oil sanctions against Iran in one go as they could serve as a key lever to ensure Tehran complies with its new pledges.

But crude’s speculative froth just needed a trigger to dissipate and the Iran news provided one. After Wednesday’s 2% slump from fresh multi-year highs, Brent and WTI futures were continuing to take a breather as we closed this report.

But the pause could dovetail with a gradual easing of Europe’s gas shortage, as Putin has instructed Gazprom to focus on filling European storages from November 8, while China is also slowly digging it way out of a coal crunch by boosting domestic supply as well as imports.

Crude could continue to soften in the coming weeks if the energy crisis indeed abates, which means this year’s price peaks may be behind us. But we don’t expect a major correction in the short term.

 

ENERGY RADAR

Oil in 2022: Through the prism of Covid, a year of moderating prices - Dec. 27, 2021

As the American baseball player Yogi Berra, known for his witticisms, might have said if he were alive today, “It’s déjà vu all over again”.

Once again, on the cusp of a new year, it feels like a duel in the making over the pandemic’s future. When 2020 was coming to a close, it was the promise held by Covid vaccines starting to be rolled out, against a deadly winter wave of infections that had begun sweeping across the northern hemisphere.

This year, it is hope that the nearly 9 billion doses of vaccines administered across the world – and growing by the day – has given us a fighting chance to put the worst of the pandemic’s fallout and the need for crippling restrictions behind us, against anxiety that the Omicron variant may pierce through the current lines of defence.