Oil markets kicked off the new year in a downbeat mood, with Wall Street analysts almost unanimously predicting a huge oversupply in 2025 even if OPEC+ did not add a single barrel back into the market. Well, it’s six months on, and oil markets have continued to defy these bearish expectations.
The eight OPEC+ countries that made additional voluntary cuts in 2023 are set to meet on July 6, with expectations that the ministers will continue the unwinding of the November 2023 tranche of cuts, increasing targets by 411 thousand barrels per day (kb/d) for the fourth successive month. Commodity analysts at Standard Chartered have also predicted a final 411kb/d increase will be announced at the August meeting, resulting in the full unwinding of the voluntary cuts that totalled about 2.2 million barrels per day (mb/d).
Thankfully, the rapid unwinding of the cuts has proved to be a highly successful strategy, with oil markets having little trouble absorbing the extra barrels. Inventories remain very low, while the prompt market remains backwardated and with the previous market fears of historic surplus giving way to a general acceptance that fundamentals entered the year stronger than most traders believed with demand remaining robust.
The latest EIA weekly data was bullish, with crude oil inventories falling 5.84 mb w/w to 415.11 mb, taking them 45.59 mb lower y/y and 51.39 mb below the five-year average. Indeed, crude inventories are currently just 5.16 mb above their five-year low, having declined by 28.05 mb (801kb/d) over the past five weeks alone while the deficit to the five-year has widened to the largest since June 2022. Distillates remain the tightest oil product group: distillate inventories fell counter-seasonally by 4.07 mb w/w to 105.33 mb, increasing the deficit below the five-year average by 4.44 mb to -26.3 mb.
Implied gasoline demand rose 389 kb/d w/w to 9.68 mb/d, the highest weekly reading since Christmas 2021. The 30 June release of the EIA’s Petroleum Supply Monthly revised April gasoline demand higher by 30 kb/d to 8.91 mb/d, taking the y/y increase from 0.8% to 1.1%. Total April oil demand was revised 488 kb/d higher to 20.213 mb/d, good for a y/y increase of 0.6%.
StanChart has predicted that oil markets will continue to absorb extra OPEC+ production easily in the short term, and has even forecast a global stock draw of 0.9 mb/d in the third quarter following a 0.2 mb/d build in the June quarter. According to the analysts, the tightening in Q3 will primarily be the result of a 1.4 mb/d q/q increase in demand while non-OPEC+ output is expected to remain fairly flat. However, StanChart has warned that the lack of compliance to set quotas by the likes of Kazakhstan could become a more significant issue when the seasonal demand strength starts abating in the fourth quarter of the current year or the first quarter of 2026. Still, the experts say OPEC+ may not need to curtail production in Q1 2026, with the projected stockbuild not likely to be any larger than normal while inventories will be starting from very low levels. However, the first line of cuts is likely to come from the overproducers if the situation does indeed warrant some production cuts.
Meanwhile, EU natural gas inventories have continued to rise at a rapid clip, with the y/y deficit narrowing on 32 of the past 34 days while the deficit below the five-year average has narrowed on 25 of the past 32 days. According to Gas Infrastructure Europe (GIE) data, EU inventories clocked in at 67.98 billion cubic meters (bcm) on 29 June, 21.58 bcm lower y/y and 10.37 bcm below the five-year average. The w/w build was 2.70 bcm, 16.5% higher than the five-year average.
The EU inventory builds are being driven by higher LNG flows. According to StanChart data based on European Network of Transmission System Operators for Gas (ENTSOG) daily data, LNG flows into the EU averaged 429 million cubic metres per day (mcm/d) over the past five months, considerably higher than 342 mcm/d average for last year’s corresponding period. EU gas demand remains subdued at 796 mcm/d, good for a y/y decline of 2.8%.
European gas prices remain exposed to significant downside risk, with a potential path below EUR 30 per megawatt hour (MWh) thanks to weak demand, stronger-than-usual inventory builds, poor market technicals and reduced concerns about LNG supply disruptions due to the Middle East conflict.
By Alex Kimani for Oilprice.com
