Do not forsake me, oh my darlin’! It’s high noon in the global energy market! Not only do we have the International Energy Agency (IEA) predicting record global demand this year, but we are also seeing signs that OPEC and Russia are serious about production cuts! Yet the real showdown may be between the G7 and Russia.
Russian oil prices have risen above $60.00, the G7 price cap, in a tightening global market. And while there may not be a panic right away, the question is who is going to blink? Will the G7 be steadfast and not pay the going price for Russian oil? If they don’t, will Russia sell the oil? And if Europe backs down, will they look like cowards? And while some are downplaying the immediate impact of the price cap right now, we already know the ending of this movie. Show me a price cap, and eventually, I will show you a shortage. EU consumers will be telling their leaders “Don’t try to be a hero. You don’t have to be a hero, not for me.”
Still, there will be plenty of drama as global demand is expected to hit all-time highs and production in the United States is predicted to fall and OPEC is showing strong commitment to their production cuts.
Russian oil exports declined to the lowest level since March of 2021 in June and Saudi Arabia’s crude oil production hit a two-year low of nine million barrels a day in July and August according to the International Energy Agency. Brent Crude closed above $80.00 a barrel for the first time since May as the track for global supplies are on track to plummet. Not only are we feeling tightness in the sour crude market in part because of Saudi Arabia’s lollipop protection cuts, as well as recent Russian oil reductions, but many of the bearish market narratives, are starting to unravel. Some believe that the reason why Saudi Arabia and now Russia want to tighten global supplies is in response to the price caps that the G7 imposed, as well as a response to global strategic petroleum reserve releases.
Also, many people were worried that Saudi Arabia and Russia were at odds because Russia seemingly failed to reduce output in the past but there is more evidence that that is not an issue. In fact, Saudi Arabia’s imports of Russian fuel oil hit an all-time record high so even Saudi Arabia has taken advantage of the good pricing out of Russia.
Oil demand, that many predicted would plummet in the face of rising global interest rates, is instead rising. The International Energy Agency (IEA) is predicting that oil demand will rise to a record-breaking 102.1 million barrels a day this year, which is a 2 million barrels a day increase year over year. And while that is down from their previous forecasts, they raised their forecast for oil demand in 2024 by 1.1 million barrels a day. As we have pointed out before the International Energy Agency traditionally underestimates demand so we expect an upward revision in the next report. Even the International Monetary Fund (IMF) reported that they have been surprised by the first quarter of global economic growth relative to their April forecast. Yet what is more important, the IMF predicted that global headline inflation may have peaked and core inflation is easing.
There was some evidence of that in yesterday’s consumer price index with a smaller-than-expected 0.2% increase in June and a 3.0% year-on-year, the smallest rise since 2021. The weak inflation data gave oil a boost because it reduced the odds that the Fed will have to become more aggressive in raising interest rates, but it also means that today’s producer price index could be another catalyst for oil to move higher if it comes in showing that inflation is at a peak. Yes, there’s still a way to go in all G20 nations to get inflation to where it needs to be.
The IEA also said that the world oil supply rose 480 kb/d to 101.8 mb/d in June but is set to fall sharply this month as Saudi Arabia makes a sharp 1.0 mb/d voluntary output cut. For 2023, global production is forecast to increase by 1.6 mb/d to 101.5 mb/d, as non-OPEC+ expands by 1.9 mb/d. In 2024, global supply is set to rise by 1.2 mb/d to a new record of 102.8 mb/d, with non-OPEC+ accounting for all of the increase.
A substantial 44.2 mb build in non-OECD countries, led by a surge in China, pushed global observed oil inventories up by 19.4 mb in May to the highest since September 2021. By contrast, OECD oil stocks drew by a marginal 1.8 mb.
Oil on water declined by 23 mb as additional OPEC+ output cuts saw seaborne oil exports falling to their lowest since January. Preliminary data show a 9.2 mb draw in June.
As global inventories are expected to draw dramatically by at least 9.2 million barrels, according to the IEA the energy secretary of the United States Jennifer Granholm is following up to refill the strategic reserve by the end of Biden’s second term. I think I would bet against both parts of that statement.
Well, today must clear a major hurdle, $76.00 a barrel WTI; it’s a very important resistance. If we close above that area, we should make a real quick test to close to $80.00 a barrel WTI. The weak producer price index could help that happen.
Unlike last year we will not have any extra oil to come to the market production that normally would have come online due to higher prices has not happened. U.S. oil production fell week over week according to the EIA. There’s no room for error in the system; better put on some protection and buckle up.