Standard Chartered: Oil Rally to Extend Beyond $90 a Barrel

Standard Chartered: Oil Rally to Extend Beyond $90 a Barrel
Standard Chartered: Oil Rally to Extend Beyond $90 a Barrel

The energy sector ended the second quarter as the second worst performer among US market sectors, posting a return of -4.5% compared to a gain of 4.6% in the previous quarter. S&P 500as fears over oil demand dominated most of the period. The energy sector has now fallen to fourth place in the year-to-date sector rankings with a return of 8.6% compared to a gain of 15.5% for the broader market index. Fortunately, the oil price rally is back on track with the September Brent contract rising to $86.60/bbl on July 1, the highest month-end contract close since April 30 and $10.24/bbl above the June 3 low.

And now Wall Street is increasingly confident that the rally has new strength to continue. According to commodity analysts at Standard Chartered, Brent’s rally is sustainable beyond $90/bbl, based largely on fundamentals. StanChart has projected that global oil markets will post a deficit in the third quarter that will spill over into the fourth, putting further downward pressure on stocks. In the near term, StanChart’s SCORPIO machine learning model forecasts a weekly rise of USD 1.70/bbl to a close of USD 88.30/bbl on July 8, with the current tight Brent-WTI and Brent-Dubai spreads, as well as technical indicators of oil prices and price levels being the most significant bullish catalysts.

StanChart notes that oil market sentiment turned extremely bearish in April with hedge funds quickly moving into short positions in the market. This shift in negative sentiment was largely driven by weak U.S. transportation fuel demand, as reported in the Energy Information Administration (EIA) weekly data. The media did not help the narrative, with some talking about decade-long demand lows and predicting an imminent collapse of the U.S. economy. In fact, the EIA estimated that U.S. gasoline demand declined 4.4% year-over-year in April, triggering a rapid shift by hedge funds into short positions in the market. However, StanChart was quick to point out that there appears to be a systematic downward bias in U.S. fuel demand estimates, with actual gasoline demand beating estimates in 22 of the past 24 months, while distillate demand (mostly diesel) has been revised upward in all of the past 24 months. StanChart predicted that the EIA’s April gasoline demand estimates were too low and that actual demand would likely surprise to the upside.

Related: Shell begins evacuation of Perdido as Hurricane Beryl threatens operations

Well, StanChart was recently vindicated, as April gasoline demand turned out to be the lowest in two months rather than the lowest in two decades. On June 28, the EIA released its monthly Petroleum Supply Report (PSM) which contained large upward revisions for gasoline, distillates (mostly diesel), and jet fuel. Year-over-year demand changes were revised to -1.5% from -4.1% for gasoline, -2.0% from -9.2% for distillates, and +5.4% from -1.0% for jet fuel. StanChart notes that the combined upward revision in transportation fuel demand amounted to 602 thousand barrels per day (kb/d), exceeding the upward revisions of 547 kb/d and 487 kb/d made to the initial data for September and November 2023, respectively.

On the supply side, the PSM revised US crude oil production in April to 13.248 mb/d from 13.1 mb/d shown in the weekly data, representing a monthly increase of 72 kb/d. This implies that April production was 47 kb/d below the all-time high of November 2023. Overall, StanChart notes that US crude oil production has only increased by 248 kb/d over the past 53 months.

Interestingly, natural gas markets have been moving in the opposite direction to oil, with the big rally that began in February reversing course lately. European natural gas futures have fallen to EUR 32.77 per megawatt-hour, approaching their lowest point in six weeks, while Henry Hub gas prices have declined from a five-month high of USD 3.13/MMBtu in June to USD 2.43/MMBtu currently. After a slow start to the European gas injection season, the rate of inventory increases has finally returned to near historical averages. StanChart notes that weekly changes in June were more than 1 billion cubic metres (bcm) below the five-year average; however, that gap has narrowed to just 0.2 bcm. According to data from Gas Infrastructure Europe (GIE), EU inventories stood at 89.94 bcm on June 30, representing a year-over-year increase of 0.43 bcm and 12.53 bcm below the five-year average.

Meanwhile, Hurricane Beryl is currently wreaking havoc in the southeastern Caribbean. However, Beryl appears unlikely to pose a direct threat to key infrastructure upstream and downstream of the U.S. Gulf, as most models project a first hit on the Yucatan Peninsula and then a second hit by a much-weakened system off northern Mexico. That said, Beryl is the earliest Category 5 Atlantic hurricane on record, a fact that has led to forecasts of a very active hurricane season. StanChart has predicted that this will likely keep the market on alert for at least the next two months.

By Alex Kimani for Oilprice.com

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