(Bloomberg) — Oil traders are beginning to ignore the most important person in the market. This could prove to be a risky bet.
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A week ago, Saudi Energy Minister Prince Abdulaziz bin Salman pledged to unilaterally cut the country’s oil production in July to the lowest in more than a decade, excluding cuts of the Covid-19 era. He described the move as a “lollipop”.
Although there have been larger production cuts in recent months, its symbolism was significant and Prince Abdulaziz left open the possibility of extending the restriction. It also came on the heels of a litany of comments suggesting the prince wants to hurt those speculating on lower prices.
However, merchants are less and less reactive. The immediate price gain from the restrictions he announced last Sunday lasted a day. As of 5 p.m. London on Friday, Brent futures were trading at around $76 a barrel – almost exactly where they were a week earlier. A previous production cut in April took less than a month to dissipate on prices.
Speaking on Sunday, the prince said the OPEC+ deal was about being proactive and cautious. “I think the physical market tells us something and the futures market tells us something else,” he said at the Arab and China Affairs Conference in Riyadh. “Understanding OPEC+ today is about being proactive, pre-emptive and pre-emptive.”
Despite expectations that demand for oil will exceed supply in the coming months, several things are fueling bears’ confidence. Two negatives really stand out: the first is that Russian shipments have exploded in the face of expectations that Western sanctions would reduce them. The second is concern about the fate of the Chinese economy, for years the foundation of demand growth.
“There are many uncertainties, as usual, when it comes to oil markets, and if I have to choose the most important one, it’s China,” said Fatih Birol, executive director of the International Security Agency. energy, in an interview with Bloomberg TV. “If the Chinese economy weakens or grows much lower than many international economic institutions believe, this can of course lead to bearish sentiment.”
Goldman Sachs Group Inc. made its third downward price revision to the global benchmark in six months, lowering its Brent forecast for December to $86 a barrel, down from its previous estimate of $95 a barrel, due to rising supply and falling demand.
China’s manufacturing purchasing index fell to 48.8 last month, lower than expected and was also the weakest reading since December, when the country was mired in Covid Zero restrictions.
Even if its economy picks up speed again, China will have plenty of crude to deplete. The country’s inventories hit a two-year high in May and several traders said they saw recent increases in Saudi oil prices to Asia alongside continued OPEC+ production cuts, in the part of an effort to exhaust this inventory.
Overall picture
This compounds a less rosy — but far from outright bearish — picture of global demand.
Since January, the IEA – whose supply-demand balances serve as a benchmark for global oil analysts – has cut 900,000 barrels per day from the projected increase in demand from the second to fourth quarters. It still expects it to rise by 1.8 million barrels per day, although some doubt that can be achieved.
Beyond China, there is global concern over industrial production, a close indicator of diesel demand. Manufacturing has been contracting globally in each of the past nine months, JPMorgan data shows, while a gauge of U.S. trucking is at its lowest since September 2021. Last week, the U.S. slashed their on-road fuel consumption prospects.
This dynamic may partly explain why cuts by Saudi Arabia and its OPEC+ allies are having less impact.
“The Producer Group is in a multiple bind: Demand appears weaker and non-OPEC supply stronger through year-end than many analysts had expected,” Citigroup Inc analysts wrote. ., including Francesco Martoccia. “OPEC and IEA forecasts had an air of wishful thinking about accelerating demand growth.”
sea stream
Stubbornly high oil flow rates don’t help.
Although they have fallen in recent months, observed oil shipments by sea are still up sharply from what they were in May 2022, a month when Chinese purchases were undermined by the country’s efforts. to contain Covid.
Bloomberg tracking shows shipments from most global exporters rose 1.13 million barrels per day year-over-year. Shipments from Russia, in particular, are soaring. The country’s crude exports were less than 100,000 barrels a day from a record in the four weeks to June 4, according to data compiled by Bloomberg.
This has led to a torpor in the face of supply cuts. Similarly, physical barrel markets are showing – for now at least – few signs of major strain, although there is still a month to go before the Saudi Arabian cut takes effect. US crude oil was sold last week in Europe at a month low. Earlier cuts by some OPEC+ members began in May.
Risky position
Despite all this, it is far from a safe bet for bears.
With the kingdom effectively supporting any price decline, some investors continue to hope for a significant tightening of the market in the second half of the year.
Chinese company Unipec bought oil from the United States and Norway last week, a possible sign that OPEC+ measures will boost the purchase of cargoes in other markets and tighten them. The Indonesian PT Pertamina has also entered the market, seizing millions of barrels of West African oil.
Booming oil refining capacity in China and the Middle East is set to be met with a “structural shortage of crude in the coming years”, said Saad Rahim, chief economist at trading giant Trafigura Group, in the company’s interim report.
Supply cuts by OPEC+, coupled with growing demand from emerging markets, are expected to lead to “significant drawdowns in inventory later this year,” he said, adding that U.S. shale could not being able to balance the market.
But even if the market turns, it may take time to filter out as traders continue to grapple with the slew of economic concerns and robust supplies that have been hampering prices for months now.
“Nobody wants to take fixed-price risk given the macro uncertainty,” said Richard Jones, an analyst at Energy Aspects. “Ultimately, they’re waiting to see physical markets tighten as the cuts take effect.”
–With help from Grant Smith, Yongchang Chin and Andrew Janes.
(Adds new paragraphs 5 and 8 with Saudi comments and Goldman’s forecast change.)
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