Oil Fundamentals Suggest Oil Prices Shouldn't Be Here

Fundamentals alone suggest oil prices should be in the mid to high $80s.

That’s what Al Salazar, a director at Enverus Intelligence Research (EIR) and the author of a recent report by the company focusing on oil prices, said in a statement sent to Rigzone late Tuesday.

“Fourth quarter oil balances are in a deficit. Global oil demand is at record levels, and crude and product stocks are low,” Salazar added in the statement.

“We also believe the markets have forgotten about the half-empty U.S. Strategic Petroleum Reserve. Therefore, any discussion of the current Brent prices having a geopolitical premium feels contradictory to us,” Salazar continued.

“While Brent fluctuates on geopolitical news, we have yet to see a sustained price premium over fundamental fair value,” he went on to state.

In the statement, Salazar said the company has downgraded its 2025 Brent price forecast by $5 per barrel “due to our conservative expectations on Chinese oil demand”.

“President-elect Trump’s proposed import tariffs and increased global trade uncertainty complicates Beijing’s task of steering China’s trade-centric economy,” he added.

EIR’s statement highlighted that a key takeaway from the company’s recent report focusing on oil prices is that EIR “expects increased volatility for Brent prices for 2025 as low stock levels, elevated geopolitical tensions, and increased global trade uncertainty all weigh on global oil balances”.

Seasonally Weak Period

In a report sent to Rigzone by Standard Chartered Bank Commodities Research Head Paul Horsnell on Tuesday, analysts at the bank, including Horsnell, said this is a seasonally weak period for oil prices.

“A comparison of the 9 December front-month Brent settlement of $72.14 per barrel with the matching date in the previous 10 years reveals that the highest price (2022) is not much different, at $76.10 per barrel,” the Standard Chartered analysts added in the report.

“Indeed, prices have only ever been higher than $77 per barrel on the equivalent day in four years (2010-13 inclusive),” they continued.

In the report, the analysts noted that their usual weekly comparison of Brent forward curves in recent years is more tightly packed than usual, “with the front of the 2021-24 curves all within a range of less than $4 per barrel and the back of the curves all within a range of less than $2 per barrel”.

“The somewhat anemic price dynamics at this time of the year, as shown in those curves, appears to be heavily macro-related,” the analysts said in the report.

“Post-pandemic, end-year oil market expectations for the following year have tended to be highly depressed with widespread concerns about hard economic landings in major consumers and a broad market consensus about imminent oil supply surpluses,” they added.

“The end of 2024 has proved little different; indeed, the fear of surplus appears somewhat deeper than usual, and the discounting of tighter immediate balances has been greater than usual,” they went on to state.

3-Day Rise

In a market analysis sent to Rigzone this morning, Samer Hasn, a senior market analyst at XS.com, highlighted that crude oil prices “continue to rise across the two main benchmarks for a third day in a row”.

“The gains in crude come as China announces plans to ease monetary policy, which could help boost the economy,” Hasn added.

“This announcement follows an earlier announcement of plans to reform the social system known as ‘hukou’, which may ultimately support consumer spending primarily in addition to the real estate market,” Hasn continued.

Also in the analysis, Hasn said the impact of the “massive and unprecedented Israeli attacks on Syria’s military infrastructure seems to have been exaggerated”.

“This does not represent an escalation of the regional war and will not ultimately damage the region’s crude supplies,” Hasn noted.

“If the markets have indeed priced this news in, a correction is not far away,” Hasn warned.

To contact the author, email andreas.exarheas@rigzone.com