Traders in Europe, which has been the region with the worst crude supply panic in recent months, are finally showing signs of improvement, and traders in the region can finally breathe a sigh of relief.
The release of 1 million barrels per day (bpd) of oil from the U.S. Strategic Reserve (SPR), refineries about to enter a seasonal maintenance period, and the return of Libyan sweet crude supplies have cooled the European crude market.
In addition to a broader recovery in global crude oil flows, the risk of a looming recession also eased upward pressure on oil prices. If this continues, fuel prices could be expected to continue to fall and help reduce the hottest global expansion in decades.
Harry Altham, an analyst at StoneX, a well-known US stock and futures brokerage, said:
“The resumption of crude production in Libya, combined with preliminary data showing a sharp increase in global crude exports last month, will help to undermine this structural rise in oil prices.”
Backwards for Brent crude futures, which hit a record high of more than $6 last week , have now fallen to just $1.50. Azerbaijani crude traded more than $12 above benchmark Brent at the end of July, and this week, the spread has risen by just $1.75.
According to foreign media estimates, the peak summer demand for gasoline in the United States may also be over, and the supply of low-sulfur crude oil used to produce refined products such as gasoline and naphtha has increased significantly. Of the 17 million barrels of SPR recently sold in the U.S., it was sweet crude, compared with just 2.8 million barrels of sour crude.
Meanwhile, crude inventories at the key storage hub of Cushing, Oklahoma, have risen for five straight weeks, while gasoline consumption is below levels seen in the same period in 2020.
Weakness in the fuel market took some of the pressure off the crude oil market. The crude market was also boosted by red-hot refining margins earlier this year.
However, much of the pullback in oil prices will prove temporary, driven in part by seasonal refinery maintenance in September, while the political situation in Libya remains precarious. In addition, the European Union’s crude oil embargo on Russia will take effect later this year, and crude oil supply is likely to tighten again.
In addition, the release of the U.S. SPR will also end in October , which will effectively reduce the market by 1 million barrels of oil per day at a time when supplies may become tight if inventories are not replenished.
Can crude oil bulls fight again next year?
Veteran industry analyst Paul Sankey said that while crude prices may have softened over the past few weeks, there is a good chance that Brent will rise to $100 starting next year. Sankey said in an interview with foreign media TV:
“From 2023, it’s easy for oil to stay above $100 consistently. And oil won’t go above $150 simply because of demand elasticity, a strong dollar, and the constraints of high oil prices themselves. Now, if it weren’t for the SPR, oil prices would be much higher. “
Rising global exploration costs and insufficient refining capacity are an ongoing problem. Since 2019, more than 2 million barrels a day of refining capacity outside the U.S. has been shut down to boost export markets for domestic oil products. U.S. oil exports hit record levels last month as the gap between WTI and Brent futures widened. Paul said:
“There’s no question that U.S. energy security policy is bad, but it’s good market policy because they’re hitting oil prices.
While Paul did not give a short-term oil price forecast, he noted that technical analysts were targeting $80 a barrel. “Honestly, in the short term, I’m also a bit bearish.”
For now, crude oil spot prices are indeed cooling.
A crude oil grade that helped determine the spot price for spot Brent was at a two-month low this week. A batch of Dalia crude oil in Angola was quoted below the benchmark price, compared to the previous month when it was above the benchmark price. Offer prices for flagship Texas crude for November, WTI Midland, arriving in Asia this week are about $7 a barrel below the previous month, according to traders who asked not to be named.
The price weakness was also reflected in the recent backwardation of WTI crude oil futures, which fell below $1 for the first time since April. Spreads have also fallen sharply for the remainder of 2022.
Oilytics founder advisor Keshav Lohiya said:
“There’s not been an extreme backwardation. It’s amazing how the crude oil market is starting to get back to normal quietly at a time when all kinds of things are going on around the world.”