Energy: Brent back below pre-OPEC+ levels
The oil market saw yet another day of weakness with ICE Brent selling off a little more than 3.8% yesterday, pushing it well below US$80/bbl and back below levels it was trading at prior to the surprise OPEC+ supply cuts earlier this month. There was little in the way of fresh developments to justify the sell-off, but clearly sentiment in the market remains negative as a result of the macro outlook. The prompt ICE Brent timepsread has also fallen back into a small contango, suggesting a more comfortable prompt market in terms of supply.
The price action we have seen in the last two weeks would suggest that OPEC+ made the right decision to announce further supply cuts. However, our balance sees significant tightening over the second half of the year, which should still mean that the market moves higher. For now though, it’s a bit tricky to figure out where the floor for the market is. The potential refill of the US Special Petroleum Reserve was meant to provide some support to prices, with the US administration originally saying it would look to refill the SPR if WTI traded down to the US$67-72/bbl range. However, the market traded down to those levels in March and we saw no action (due to maintenance and mandated SPR releases). Instead, the start of any potential refill may only happen in the second half of the year, if prices are attractive enough. This once again leaves OPEC+ as the most likely candidate to provide support to the market, and noise of further intervention is only likely to grow if we were to see Brent trading down towards US$70/bbl. Trading significantly lower than this would see oil prices below the fiscal breakeven for a number of Middle Eastern producers.
The market ignored what was largely a constructive inventory report from the EIA. The EIA reported that US commercial crude oil inventories fell by 5.05MMbbls over the last week, which was more than the 1-1.5MMbbls draw the market was expecting. In addition, gasoline and distillate stocks fell by 2.41MMbbls and 577Mbbls, respectively. Implied gasoline demand also saw a strong recovery over the week, increasing by 992Mbbls/d to 9.51MMbbls/d.
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