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Brent Needs To Be $90 or Higher To Reflect Actual Fundamentals

Oil prices have enjoyed a sustained rally in the current month thanks to bullish demand projections and encouraging oil product inventory draws. Brent briefly touched this year’s high at $83.59 per barrel in Wednesday’s intraday session before pulling back slightly as the markets continue to digest inflation numbers that came in higher than Wall Street’s expectations. Brent has settled higher on five of the past six trading days. Products have also been stronger, with the expiring February ICE gasoil contract gaining $100.25/t (12.3%) w/w to settle at a three-month high of USD 918.25/t on 12 February.

The U.S. annual consumer price inflation for the month of January clocked in at 3.1%, lower than December’s reading at 3.4% but higher than the Wall Street consensus of 2.9%. The latest inflation number has triggered fears that the Fed will not be in any particular hurry to start cutting interest rates, which in turn has led to U.S. Treasury rates and the dollar climbing. A stronger dollar tends to depress oil and commodity prices.

Quite naturally, the bulls are beginning to wonder whether the current rally has any real momentum and how high oil prices can go.

Well, according to commodity experts at Standard Chartered, oil and product prices still have some distance to cover to accurately reflect rapidly tightening of the market as well as the recent escalation of geopolitical risk.

StanChart says a Brent price needs to move above $90/bbl to more adequately reflect current fundamentals and risks. Unfortunately, the race to $90 oil is likely to be a grueling one, with volatility in oil markets still low. StanChart has reported that the 30-day realized annualized volatility for front-month Brent came in at a four-month low of 22.3% at settlement on 12 February, good for a lowly 16th percentile of all trading days in the past five years. The analysts say there’s a significant disconnect between oil-market volatility in the lower 20% tail, with the current geopolitical risk justifying volatility in the higher 20% tail. In other words, oil markets are too calm in the face of a potential storm.

StanChart is not alone here. According to J.P. Morgan, the oil market outlook "continues to project a tightening market with prices rising from here by another $10 by May." The JPM forecast has assigned no risk premium from the Middle East turmoil and assumes that OPEC+ leaders will unwind 400K bbl/day of cuts from April. According to JPM, whereas OPEC's implementation has been "ambiguous" in the first month of the new round of production cuts, crude shipments on a 30-day moving average basis have declined 1.3M bbl/day from the October peak. Meanwhile, observable crude inventories have steadily drawn down over the last month in pivotal markets in the U.S., Europe, China, Japan and Singapore.

Oil Markets Are Tighter Than Expected
StanChart has reiterated its earlier position that oil markets are much tighter than oil prices suggest.The analysts have estimated that the January surplus clocked in at 257 kb/d, good for a 3.1 mb/d decrease from a year ago and 1 mb/d below the five-year average. They have forecast that the small surplus will be followed by deficits of 1.60 mb/d in February and 1.46 mb/d in March. StanChart has forecast that we will see very little incremental growth in U.S. crude oil supply from current levels.

Projections by the Energy Information Administration (EIA) follow a similar trend to StanChart’s. Following the recent cold snap in the US; the EIA has revised its January U.S. supply lower by 625 kb/d and its January U.S. demand lower by 369 kb/d. The EIA now expects a supply surplus of 613 kb/d in January, flipping to deficits of 2.33 million barrels per day in February and 796 kb/d in March. The EIA also estimates that U.S. crude oil supply hit an all-time high of 13.338 mb/d in December 2023, 30 kb/d higher from the previous month and 338 kb/d above the pre-pandemic high achieved in November 2019. The U.S.-based energy agency has predicted that the December 2023 peak will not be surpassed until February 2025, with y/y growth falling from 1.2 mb/d in December 2023, less than 20 kb/d in June and July 2024, before turning negative for the rest of the year.

By Alex Kimani for