Path of Least Resistance for Oil Prices is Now Up

The path of least resistance for oil prices is now upwards.

That’s what analysts at Standard Chartered think, according to a new report sent to Rigzone late Tuesday, in which the analysts said the unwinding of speculative length appears to be complete. The analysts warned in the report that there might be a “retest of the lows” if the FOMC hikes its policy rate by more than 25bps this week but added that this is not their base case expectation.

“The price of front-month Brent fell from a high of $86.75 per barrel on March 7 to a low of $70.12 per barrel on 20 March,” the analysts stated in the report.

“A general reduction in risk across asset markets started an unwind of speculative length in oil - the pace of decline was then accelerated by trend-following funds’ selling and then by significant selling by banks in response to gamma-effects as prices neared a concentration of producer puts around $70 per barrel WTI and $75 per barrel Brent,” the analysts added.

“As prices rise from the lows and move back towards the steepest part of the producer put options curve, last week’s gamma effects should go into reverse, with banks buying back positions and reinforcing the short-term rebound. Beyond that, we think the key questions for traders will be whether fundamentals, OPEC policy and consuming countries’ strategic inventory policy are likely to shift,” the analysts continued.

In the report, the Standard Chartered analysts highlighted that they see a surplus in early Q2 and a “modest deficit” the rest of the year.

“There seem to be few useful parallels with the global financial crisis, when the surplus peaked at above five million barrels per day in November 2008,” the analysts said in the report.

“We do not think OPEC needs to cut in the short run, although we think a post-FOMC signal from key producers about the need for less chaotic and less technically-driven market behavior might help to speed price stabilization,” the analysts added.

The Standard Chartered analysts went on to outline in the report that their oil supply-demand balance “is relatively benign in terms of its price implications”.

“It does not lend much fundamental support to the recent push down to $70 per barrel, but it also does not support any sustained surge this year above $100 per barrel. Our balances include an increase in OPEC output by late-Q3 of 0.7 million barrels per day from current levels, with China’s 2023 year on year demand growth forecast at 678,000 barrels per day,” the analysts added.

The Standard Chartered analysts revealed in the report that they expect Russian oil production to decline “a modest” 0.2 million barrels per day from its “already reduced” March level by end-year, “a trajectory that would produce a year on year annual average Russia supply decline of 821,000 barrels per day”.

“We estimate that OPEC output averaged 29.09mb/d in February, close to our forecast call on OPEC crude in Q2 (29.0 million barrels per day), but below the H2 call on OPEC (29.9 million barrels per day), providing some scope for an output increase at some point during H2,” the analysts added.

The report showed that Standard Chartered expects Brent to average $91 per barrel in 2023, $98 per barrel in 2024, and $109 per barrel in 2025. WTI is expected to average $88 per barrel in 2023, $95 per barrel in 2024, and $106 per barrel in 2025.

In quarterly terms, Brent is anticipated to average $90 per barrel in Q2, $88 per barrel in Q3, $93 per barrel in Q4, $92 per barrel in Q1 next year, and $94 per barrel in Q2 2024, the report outlined. WTI is expected to average $87 per barrel in Q2, $85 per barrel in Q3, $91 per barrel in Q4, $89 per barrel in Q1 2024, and $91 per barrel in Q2 2024, the report highlighted.

Standard Chartered’s yearly and quarterly projections for Brent and WTI were exactly the same in a separate report the company sent to Rigzone back in February.

Decade of Underinvestment

In 2008/9 a decade of underinvestment had put de-facto control of oil markets back in the hands of OPEC, and Saudi in particular, “that famously, after a $100 correction in oil prices, declared that '$147 would destroy demand and $47 would destroy investment',” BofA Global Research said in a report sent to Rigzone late last week.

“What followed was a five-year period where OPEC policy held oil in a range around $100 until industry overcapitalization pushed the limits of Saudi’s tolerance for loss of market share to defend price,” BofA Global Research added in the report.  

“While its efforts to corral U.S. shale growth failed in 2015, it succeeded in 2020 with Covid replacing the 1997 financial crisis as the opportune window to flex its low-cost advantage by flooding the market with unnecessary oil,” the company continued.

“Winning back control of oil markets has been our characterization of OPEC+ (Saudi) policy since then, with its self-described ‘regulatory’ role defining our view of '$80 as the new $60' perhaps drawing a line in the sand amidst an uncertain macro backdrop that puts demand uncertainty in focus. But this is precisely the set up where OPEC intervention often carries the day in restoring some semblance of stability with the next JMMC meeting arguably the next major test of that thesis,” BofA Global Research went on to state.

The 47th Meeting of the Joint Ministerial Monitoring Committee (JMMC) took place via videoconference on February 1. At that meeting, the JMMC reaffirmed its commitment to the declaration of cooperation, which extends to the end of 2023 as agreed in the 33rd OPEC and non-OPEC Ministerial Meeting on October 5, 2022.

“The committee reviewed the crude oil production data for the months of November and December 2022 and noted the overall conformity for participating OPEC and non-OPEC countries of the Declaration of Cooperation,” a statement posted on OPEC’s website noted.

“The members of the JMMC reaffirmed their commitment to the DoC … and urged all participating countries to achieve full conformity and adhere to the compensation mechanism,” the statement added.

In October last year, OPEC revealed in a statement on its site that the OPEC+ group decided to cut production by two million barrels per day from August 2022 levels at its 33rd meeting. According to a production table accompanying that statement, Saudi Arabia and Russia will take the brunt of this cut at 526,000 barrels per day each.

OPEC+ decided to keep production steady at its 34th meeting. The group’s next meeting is currently scheduled to take place in June.

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

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