Oil market sentiment shifted from a focus on supply concerns to fears of a global recession resulting in a sharp sell-off.
Despite the sell-off, physical crude markets have remained tight and will likely remain so in August.
However, from September onward, the market will show length returning, which is likely to start influencing pricing.
With refinery, margins are declining from their highs and sentiment is shifting away from the bullish trends.
Looking ahead, signs show the physical market will become less tight as it moves into the second half of 2022.
Organization for Economic Cooperation and Development commercial inventories are expected to be built by end-December 2022.
However, escalating trade friction with Russia towards the end of 2022 will provide price support, keeping Brent above $100 per barrel for the rest of 2022.
Moving into 2023, as stocks rise, there will be less support for market structure and backwardation could drop, leaving Brent sliding towards $100 per barrel and below.
JPMorgan says Russia has had little problem rerouting its oil exports, meaning the expected plunge in production never happened. If this is clear to the market, then it will certainly impact prices.
Total global oil output is estimated to have surged in July due to some easing in the level of unplanned outages.
Looking ahead, much of the increase will come from growth in US shale oil as production there continues to grow because of high oil prices.
However, the global supply outlook continues to have uncertainties. Russia continues to carry the most risk, given the potential for greater supply outages as the European Union’s new crude sanctions take effect on Dec. 5, 2022.
The EU embargo on oil imports, restrictions on European shipping insurance and the expiry of a waiver from US financial sanctions for energy-related transactions are all due to come into force on Dec. 5, which may force more Russian oil production offline by early next year. Moscow is likely to be looking for any opportunity to undermine Western resolve to implement these restrictions in full.
Moreover, Libya’s output has been heavily impacted by political unrest over the past few months, with state-run National Oil Co. aiming for an output of 1.2 million barrels per day in early August.
In addition, the US hurricane season is approaching. US production growth estimates by the main agencies for December vary from 12.3 to 12.6 million bpd.
Iran’s output could rise if it reaches a deal with the US to lift or ease sanctions. However, no progress is expected in US-Iran talks for at least another 12 months.
Persistent, steep backwardation has been driven by ongoing concerns of supply tightness, particularly of sweet crude, supply dislocations due to geopolitical developments in Eastern Europe, and low product stocks in the EU.
The strong performance of Brent relative to West Texas Intermediate reflects its use as an international benchmark at a time when global oil market fundamentals are strengthening.
In the US, concerns of an economic slowdown as confirmed by most recent downside revisions of the International Monetary Fund’s gross domestic product growth forecast amid an increasingly hawkish US Federal Reserve have weighed on WTI prices, exacerbated by reports of sluggish demand and gasoline stock builds.
With ongoing EU sanctions on Russian crude imports and Russian oil products coming into effect in 2023, the backwardation structure will likely remain in the near term.
State-backed infrastructure spending in China is expected to support industrial oil consumption; China’s oil demand is expected to increase from July to December, from January to March level.
India’s oil demand is expected to climb to 5.3 million bpd in September as construction and agricultural activity pick up after a monsoon season, which would support the market.
Key policy interest rates have been significantly lifted by both the European Central Bank and the US Fed, and are expected to rise further in the second half of 2022. This will most likely dampen investment, along with consumption to some extent.
While the main impact will be felt in 2023, it will likely slow economic activity as well as oil demand during the second half of 2022.
