ZE Oil Market Outlook: Crude Makes a Comeback.

- By Chinedu Okoye 



Overview:

In the last blog post titled: “Could Crude be Making a Comeback?”, the breakaway from previous ranges and the testing of new highs were noted. However we cautioned that it was likely shortlived, stating bearish factors like demand, consumer straight and confidence in the worlds largest economies and continuous US production.

The bullish case was grossly underestimated, leading to a reality different from what was anticipated, as oil now at $68.21 (BRENT) and $64.11 (WTI). 

(BRENT Week-on-week)

This stronger than anticipated move is due to factors that wasn't factored, and would seem improbable at the time, probing to be powerful support, lifting prices way above the target we had it for H12026.

(WTI Week-on-week)


What We Missed:

Factors driving this rally were not fully anticipated or appreciated at the time of the last post and these have been crucial to this rally.

The factors include; a weak USD, tighter supply constraints, and temporary outages. 

• A weak US Dollar: With the DXY at 96.450, falling from above 98 in the past week, as the greenback took a hit in the past weeks, has played no small role in this rise, with oil prices in USD, a weaker dollar makes crude cheaper, and could prop up demand as a result.


The assumption was that the USD would hold firm, but in fact it eased enough to give not just oil but commodities in general an extra bid.

• Tighter Supply Constraints from Oil Sanctions: This is another factor that was downplayed, the new limits placed on supply with other sanctions on Russia, as major Oil Importers (most notably India and China) have not let up purchases. These sanctions squeezed Russian Crude out of the market, tightening global supply more than anticipated with demand holding, thus far.

• Other Supply Disruptions: Other fators that have disrupted supply include outages in Kazakhstan’s Tengiz oilfield and the Caspian Pipeline (CPC) forced a “force majeure” which “removed a significant number of barrels from the market,” per UBS.

This wasn’t on our radar, but has has contributed to a temporarily tightened global balance. Also, severe winter weather in North America briefly cut US output, plus a US tanker incident in the Black Sea added short-term volatility.

Chinese Inventories: China's import behaviour was also miscalculated as the data shows that China has kept buying crude even as consumer demand stays cold.

This inventory-driven buying has absorbed barrels that might otherwise have weighed on prices, adding to the bullish mix even in the absence of strong consumer demand.


Supply-Side Review: Balancing Upside with Downside

Supply hasn't been reigned in, especially out of the US as Crude Oil Production out of the US is near record levels keeping global markets well supplied despite the sanctions and OPEC supply limitations.

However the combined impact of currency weakness, sanctions, geopolitical risk, and temporary outages has neutralized much of this supply overhang in the short term. The broader fundamentals however, remain. The rally not unanticipated seen as crude was down 19%-20% at the time of the write up. On that, the recent move is a recovery from deeply discounted levels.


Revised Outlook:

• The rally seems more substantive than originally expected. The uplift to Oil however is owed more to a combination of a weaker dollar, new sanctions, and OPEC production quotas.

• Caution is still held as a meaningful pickup in overall consumer demand and confidence may limit gains as the rally has little to do with market dynamics than artifialc and unanticipated factors boosting prices.

• If the US dollar stays low, it could be that Oil has just been, or is in the process of a repricing or revaluation.

• The tug of war between bullish and bearish catalysts still hold, though prices have moved in favor of the bulls, the bull strength may be limited should some catalysts either fade, or run its course.

• On the balance, oil is now expected to trade in a higher range than before, but remain capped unless fundamentals change. New ranges would be determined should prices plateau.

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