The oil markets have been oversupplied over the past few months thanks to overall weak demand following warmer than expected weather in Europe. The U.S. crude market started signaling oversupply in November, the first time supply exceeded demand in 2022. The front-month spread, traded in contango in November ahead of the December contract’s expiry. Front-month spread is used to gauge short-term supply-demand balances. Luckily, the rest of the market retained a bullish structure known as backwardation, an indication that the bearishness could yet be a short-term one. Well, the bulls have finally been vindicated with the surplus in U.S. commercial inventories having all but disappeared. After months of providing ominous signals about the global oil market and the health of the U.S. economy, the weekly Energy Information Administration (EIA) report has started sending significantly more positive indicators.
Commodity analysts at Standard Chartered have revealed that their proprietary U.S. oil data bull-bear index climbed a sizzling 29.1 in the latest week to hit an ultra-bullish +98.4. According to the experts, this marks the second-strongest reading on record for the decade-old index and the second consecutive ultra-bullish reading. Inventories fell against the five-year average in all categories apart from jet fuel, with large draws against the average in crude oil (7.08 million barrels of which 3.21 million barrels was at Cushing), gasoline (6.04 million barrels ) and distillates (3.88 million barrels). Gasoline inventories have become particularly tight, currently hovering around an eight-year low for March.
U.S. commercial inventories hit a peak deficit to the five-year average of 151.7 million barrels at the start of June 2022, around the time when oil prices peaked. The deficit was then filled by mid-February in the current year after which a surplus started growing, peaking at 34.7 million barrels about three weeks ago. The surplus then started shrinking to just 1.6 million barrels in the EIA’s latest report, with the U.S. market now appearing to be headed back to deficit territory.
StanChart says that the demand element of the data has also become stronger, with the four-week average of the demand bull-bear sub-index turning positive for the first time since mid-April 2022. StanChart has predicted that the likely contraction in global inventories over the coming months could support an improvement in oil market sentiment, with hedge funds in particular still largely bearish.
OPEC+ Cuts To Eliminate Surplus
The bulls have more reasons to feel upbeat about the long-term oil price trajectory. On Sunday, OPEC+ announced that it will reduce its output further, by some 1.66 million barrels per day, bringing the cartel’s total output reduction to 3.66 million barrels daily, or 3.7% of global oil demand. To sweeten the deal further for the oil bulls, Russia announced it would extend its 500,000 bpd cut until the end of 2023. The announcement triggered an immediate 8% spike in oil prices that had languished for months amid weak demand and a worsening macro outlook.
Oil prices have only been treading water since the big initial gains from the shock announcement, with concerns regarding global demand and recession risks continuing to weigh down the oil markets. Indeed, oil prices barely budged even after EIA data showed that U.S. crude stockpiles fell 3.7M barrels last week, with inventories of gasoline and distillates also falling even as Saudi Arabia hiked its official selling prices for all oil sales to Asian customers starting May.
But StanChart has predicted that the OPEC+ cuts will eventually eliminate the surplus that had built up in the global oil markets. According to the analysts, a large oil surplus started building in late 2022 and spilled over into the first quarter of the current year. The analysts estimate that current oil inventories are 200 million barrels higher than at the start of 2022 and a good 268 million barrels higher than the June 2022 minimum.
However, they are now optimistic that the build over the past two quarters will be gone by November if cuts are maintained all year. In a slightly less bullish scenario, the same will be achieved by the end of the year if the current cuts are reversed around October.
By Alex Kimani for Oilprice.com