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The Next Two Months Will Be Critical For Oil Fundamentals

Energy markets have kicked off the new month on the back foot, with oil prices sliding 3% in Wednesday’s intraday session following a surprise U.S. inventory build amid lingering uncertainty about future oil demand growth.
Weekly data by the Energy Information Administration (EIA) reveals crude stockpiles of 7.3 million barrels for the week to April 26, a sharp swing from a draw of 6.4 million barrels posted the previous week.  
That marks the highest inventory levels since last June. Meanwhile, the Fed is expected to keep its benchmark federal-funds rate steady at around 5.3%, its highest level in more than two decades amid stubbornly high inflation.
Thankfully, the oil and gas outlook appears more bullish on a global scale. According to commodity analysts at Standard Chartered, oil supply and demand balances show a significant tightening in the current year, a sharp contrast to large surplus conditions of early 2023.
Russia Is Ready to Alter OPEC+ Production if Necessary
StanChart’s model shows a cumulative global stock draw of 189 million barrels (mb) in H1-2024 compared to a build of 218 mb recorded over last year’s corresponding period which overhung the market and flattened forward price curves.
According to their model, the fastest rate of stock draws in the first half of 2024 should happen in May and June, essentially meaning that we are now entering a key period for oil fundamentals that will determine whether the market will tighten further or disappoint.
StanChart says the key metric to watch is global oil demand, which they have predicted will hit an all-time high of 103.1 mb/d in May and rise further to 103.8 mb/d in June. The analysts have forecast y/y demand growth at 1.62 mb/d in May and 1.74 mb/d in June.
Interestingly, the EIA has similarly forecast June demand to clock in at 103.8 mb/d, but is cautious about May, predicting demand of 102.2 mb/d. The  H1 draw in StanChart's model takes place in May and June, while the EIA sees nearly half of the H1 draw taking place in June alone.
All eyes will be trained on OPEC+ when it holds its next ministerial meeting on June 1 in Vienna. It’s, however, unlikely that analysts and industry experts will have garnered adequate information on actual May and June fundamentals at that point, meaning they will have to largely rely on reflected indicators, such as market spreads, prices and sentiment. StanChart’s model shows that OPEC has scope to increase output by over 1 mb/d in Q3 without increasing global inventories. However, the analysts have pointed out that the organization is unlikely to make any dramatic moves without knowing whether the expected H1 tightening was fully delivered in May and June. Given this backdrop, StanChart has predicted the supply deficit to exceed 2 mb/d in August if production stays at current levels. StanChart says oil markets are yet to price in the potential deficit.
Gas Markets Turn Bullish
A late cold snap has paused the European gas injection season, with EU gas inventories have risen over the past seven weekdays while the inventory build above the five-year average has now contracted for 13 consecutive days. According to the latest Gas Infrastructure Europe (GIE) data, Europe’s natural gas Inventories stood at 71.60 billion cubic meters (bcm) on April 28, good for a y/y increase of 3.09 bcm and 18.15 bcm above the five-year average. However, the cold snap has not materially affected the long-term bearish view that spare storage capacity is likely to become constrained in late summer, although it pushed back the timing of the tightness by about three weeks.
Natural gas markets have also been reacting to possible fresh sanctions on Russian gas. TotalEnergies (NYSE:TTE) CEO Patrick Pouyanne has predicted that natural gas and LNG prices will spike after the EU sanctions Russian gas from the Yamal LNG project.
"If the EU sanctions Yamal LNG, the price of LNG will go up quickly and globally our portfolio will benefit. It's a positive if there were sanctions, not a negative, because the cash from Yamal is quite limited. European leaders understand that their security of supply today relies on LNG and they don't want to see price rises again... what I understand is that they might have some ideas, but from 2027 on, not before,"  Pouyanne told Reuters.
By Alex Kimani for Oilprice.com
May 13, 2024 11:30
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