Where is oil headed? Some thoughts...Putting economic, fiscal conditions, and fears of additional rate hikes, and market collapse aside, it is tough to predict the price of oil on a short term day to day basis.
Accepting that this is a third down day in a row, on a Friday, where shorters have piled on, nobody wants to hold over the long weekend, on an OPEX day, after hawkish rate hike data, and big inventory build news. Not surprising to see some pressure today.
Assuming the market continues to kick that Pandora's debt can down the road, my crystal ball points to a steady climb up starting perhaps within weeks, once this amplified seasonal glut in front of us is whittled down, and inventories start to shrink on a global basis.
As oil price movements get pushed around and magnified by algos and paper traders, the producers have stayed relatively strong in comparison, breaking their traditional lock step movements to the price of oil. So is the price of oil going to rise to catch up with the producers, or are the producers going to drop down to meet oil?
From the profits that these companies generate, even at $60 oil, the market thinks it is the first option. Companies have proven true to their word, paid down debt, initiated share buybacks, and paid dividends while demonstrating a disciplined approach to increasing production. The market is forward looking, and does not expect prices to stay this low for long.
The short term futures contango curve, means you pay higher prices going forward, but now you pay lower prices to take delivery now.
The strengthening USD has taken a big bite out of commodities like gold, and oil. Should this start to reverse, it boosts oil.
Another positive side for Canadian producers, WCS/WTI differentials have been narrowing as expected, now around $18.
WTI is priced back down at the Biden Put, bouncing today off $75, the top of the range where the SPR was to be refilled. (If they ever get the chance).
The many buyers that have front run the Russian products embargo still have ships in transit yet to unload which will add to on shore inventories, so I expect current downward pressure on oil will drag on a bit more. Same goes for gasoline inventories. Prices shoud drop at the pumps soon, taking a bit more pressure off inflation.
The bottom falling out of Nat Gas due to warm winters and the Freeport export terminal being offline hasn't helped heating oil either. We now have less diesel demand as trucking has dropped, so distillates will come under pressure a little longer. On the other side, jet fuel demand is getting strong, especially outside NA.
Just around the corner, we have a larger than normal refinery maintenance starting up earlier, which is starting to drop refinery utilization rates and product inventories. Crude builds during this time, but for integrated companies making gains on better crack spreads, it helps offset it.
US February holiday gas demand this long weekend is kicking in which will give it's annual spike in demand.
We have an overstated oil inventory report that may soon balance out due to data timing issues as adjustments which may wash out with the next report.
China's mobility data is increasing. China's refinery utilization is picking up as well, with increased teapot quotas meaning they will go through more of their stored oil, and take more from the market. Despite its stellar adoption rate of EVs, it is poised to break their all time record oil demand. That addition is .5 to 1M bpd to demand. I note that there are now 500 planeloads of Chinese tourists per day flying over my head coming to Bangkok and Chiang Mai. Funny, balloon flights are cancelled.
Russia will produce .5M bbls less starting next month.
Cooling season in the ME will start soon, drawing an extra 1m bpd for power generation.
OPEC+ strongly stated they are keeping firm on present quotas, and not bringing additional oil onto the market, even with the Russian cut. For a change, we know what they are going to do now.
Conditions for WTI arbitrage are becoming more in favour, which leads to more US crude exports, drawing down US crude inventories.
The oil market is a huge tug of war with so many variables pulling it both ways. Tough to call.
One can pick a side, or not. But remember that each day that goes by, more debt is paid down, more shares are cancelled, more dividends are earned, and they kicked the can further down the road.