Brent crude was hurt by fear of higher for longer U.S. rates and a lukewarm Chinese economy, Bjarne Schieldrop, the Chief Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), outlined in a report sent to Rigzone on Monday.
“Brent crude traded between $81.72 per barrel and $84.08 per barrel last week and sold off 1.8 percent Friday to Friday with a close of the week of $82.08 per barrel,” Schieldrop said in the report.
“Optimism for oil was tempered on Friday by strong U.S. payrolls data, which, together with surprisingly high U.S. PCE inflation the week before, indicates that the U.S. Fed may have to keep rates higher for longer and hurt the economy, and oil demand in the end,” he added.
“Brent crude sold off early this [Monday] morning dipping down to $81.35 per barrel with concerns over the strength China’s economy this year as there has been limited signals coming out of the National People’s Congress with respect to stimulus,” he continued.
Schieldrop stated in the report that Chinese iron ore has sold off 4.6 percent as a result and “probably smitten over to oil as well”.
“Brent crude is however off the lows and trading at $82.2 per barrel at the moment of writing,” Schieldrop noted in the report. At the time of writing this article, Brent is trading at $82.87 per barrel.
Speculative Positions
It has been popular to be sensibly concerned about the global economy, about oil demand, about OPEC+ resilience, and about U.S. shale oil discipline, Schieldrop said in the report, adding that “there has thus been limited conviction for quite some time that Brent crude would manage to stay at $80 per barrel level or higher”.
“But total commercial U.S. crude and product stocks have ticked lower and lower so far this year and are now down 28 million barrels since the end of 2023,” he added.
“Global floating stocks are down 11 million barrels so far this year as well. This points to a global market running a deficit,” he continued.
Schieldrop said in the report that net long speculative positions have moved steadily higher since mid-December 2023 “in a reflection of this together with receding fear that the U.S. and the global economy will fall apart in 2024”.
According to the SEB Commodities Chief, U.S. shale oil consolidation is “at the very foundation of growing bullish views”.
“Speculative convictions for higher prices are not based on a rallying, robust global economy but more that the global economy is not going to fall apart,” he said.
“But the absolute, most important basis for Brent crude prices at $80 per barrel or higher is the consolidation of U.S. shale oil with close to zero growth from Dec-23 to Dec-24 and limited growth in the years to come,” Schieldrop added in the report.
“This again hands the power in the oil market back to OPEC+ and OPEC+ knows it,” he continued.
OPEC+ Cuts
New OPEC+ production cuts were recently announced. In an opinion piece posted on Wood Mackenzie’s website last week, which focused on the cuts, the company’s Americas Vice Chair, Ed Crooks, noted that Ann-Louise Hittle, Wood Mackenzie’s Head of Macro Oils, said the decision to extend the voluntary production cuts should have a “dramatic” impact on the short-term oil market outlook.
“Extending the cuts will accelerate the expected drawdown from global oil stocks,” Crooks said in the opinion piece.
“Wood Mackenzie had forecast that without the extension, the implied stock draw would be about 600,000 barrels per day in the second quarter. With the extension, we expect the draw to be about one million barrels per day greater than that,” he added.
“OPEC has many times in recent years been pronounced dead, killed off by the U.S. tight oil boom, but it remains influential today and could be even more influential in the future as U.S. production starts to decline,” he continued.
To contact the author, email andreas.exarheas@rigzone.com
