U.S. oil futures slipped below $81/bbl on Tuesday after weak economic data out of China prompted surprise interest rate cuts by the People's Bank of China. China's industrial production rose 3.7% in July compared to a year ago, well below the 4.4% increase analysts had predicted while real estate investment in July accelerated to a 8.5%Y/Y decline. Thankfully,oil-specific data came in much more positive, with refiners processing 14.93M bbl/day of crude oil in July, up 31% Y/Y and 40,000 bbl/day higher than the June figure.
China worries aside, physical markets continue to show signs of strength, with Asian refineries expected to continue ramping up imports while crude inventories at the Cushing, Oklahoma, hub are expected to drop to their lowest level since April.
Supplies have become increasingly tight since late June as Saudi Arabia and Russia cut production. Indeed, the latest energy report by the International Energy Agency (IEA) revealed that global oil demand grew by 3.26 million barrels per day in Q2, reaching an all-time high of 103 mb/d. The IEA estimates that the call on OPEC and inventories will be 30 mb/d in Q3 and 29.8 mb/d, which implies inventory draws of over 2mb/d in both quarters at current OPEC output levels; the IEA assessed OPEC output at 27.86 mb/d in July. The call on OPEC is a measure of the “excess demand” that OPEC countries face, and equals the global oil demand minus both the crude oil production by non-OPEC countries and the production by OPEC countries which are not subject to quota agreements.
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Commodity analysts at Standard Chartered have buttressed that view saying their projections also imply large inventory draws peaking at 2.9 mb/d in August. However, their timing for when demand will hit a new high is a couple of months later than the IEA’s. StanChart estimates that June demand was about 0.5 mb/d below August 2019’s all-time high, but expects the record will be exceeded in the current month. According to the analysts, highly effective producer output restraint, led by Saudi Arabia, will create the conditions for a price rally that will take Brent prices above this year's high at $89.09/bbl onto their Q4-average forecast at $93/bbl, with a likely intra-quarter high above $100/bbl.
Last month, the Energy Information Administration (EIA) forecast total U.S. output will hit 12.61M bbl/day in the current year, eclipsing the previous record of 12.32M bbl/day set in 2019's and easily beating last year's 11.89M bbl/day. U.S. crude oil output is up 9% Y/Y, which under normal circumstances would blunt OPEC’s efforts to keep supplies low in a bid to goose prices. There is little doubt the U.S. Shale Patch is largely responsible for keeping oil markets well supplied and oil prices low: Rystad Energy has estimated that whereas OPEC and its allies have announced cuts amounting to ~6% of 2022's production, non-OPEC supply has made up for two-thirds of those cuts, with the U.S. accounting for half of that. Thankfully, U.S. output is unlikely to go high enough to put significant pressure on international prices.
StanChart says the sharp tightening shown in most H2 balances is starting to spill-over into physical markets, and oil prices appear to be well supported to overcome the negative news coming from China.
Meanwhile, the European gas market remains highly volatile. Reports of potential strike action at Australian liquefied natural gas (LNG) facilities about a week ago caused Dutch Title Transfer Facility (TTF) prices to spike 40% higher, peaking at EUR 43.545 per
megawatt hour (MW/h). Whereas most of the upward move was swiftly reversed, front-month TTF still managed to settle at EUR 34.434/MWh on 14 August, a w/w gain of 13%.
TTF prices have now risen 21.4% over the past two weeks despite increasingly bearish inventory dynamics. According to Gas Infrastructure Europe (GIE) data, EU gas inventories stood at 103.84 billion cubic meters (bcm) on 13 August, up 19.25 bcmY/Y and 17.86bcm above the five-year average. Europea’s gas stores are now 89.5% full, a level they took 57 more days to reach last year. The pace of refill continues being torrid, with the build over the past week clocking in at 2.56 bcm, the fastest in any seven-day period since late-May. EU gas inventories are currently just 5.59 bcm below last year’s high; a mere 8.64bcm below the all-time high and just 12.25bcm below the GIE estimate of full capacity.
It will be interesting to see how the markets react when Europe’s gas stores are finally full.
By Alex Kimani for Oilprice.com