Don’t expect any surprises from OPEC+, even as recession worries weigh on oil prices

Oil is among the biggest commodity gains for the year, as global supplies remain low, but the potential for a recession threatens demand as major producers prepare to make another decision on levels. of production.

So far this year, the American benchmark West Texas Intermediate CLQ22,
+ 3.28%

+ 3.28%
crude is trading at around 39% and world-leading Brent crude futures BRNQ22,
+ 2.93%

+ 2.79%
has risen more than 40%, as of Thursday. The S&P GSCI Energy Index has a gain of approximately 50% for the year.

Oil supply is “very tight and increasingly tight,” says Darwei Kung, head of commodities and portfolio manager at the DWS group. Some 2 million barrels a day of Russian oil and refined supplies are likely to be “stuck at the moment by official or voluntary sanctions.”

Meanwhile, U.S. production has not returned to pre-Covid-19 levels, as the pandemic-related labor shortage and supply chain limitations take time to resolve, Kung adds.

At current prices, the energy industry should see significant capital investment, but rising regulations, tariffs and protectionist policies of some governments “inhibit the free flow of capital,” says Taylor McKenna, an analyst at Kopernik. This has contributed to the scarce oil supply and suggests that high prices may continue.

Some members of the Organization of Petroleum Exporting Countries, such as Saudi Arabia and the United Arab Emirates, have the capacity to increase production. In general, however, OPEC and its allies, collectively known as OPEC +, have failed to collectively achieve their production targets.

OPEC + underperformed its production target by 2.616 billion barrels a day in May, according to a report by S&P Global Commodity Insights. There is “very limited surplus capacity in the Middle East, and none outside the Middle East,” says Pavel Molchanov, an analyst at Raymond James. Iran has the capacity to spare, but is subject to sanctions, he says.

President Joe Biden will visit the Middle East next month, including Saudi Arabia, where he plans to talk about energy security. His visit will follow the decision on the level of production of OPEC + on 30 June. At the June 2 meeting, producers agreed to increase their collective production target in July and August by 648,000 barrels a day each month, compared to monthly increases of 432,000 barrels a day. they have done since last year.

The European Union is ready to implement a ban on almost all Russian oil imports by the end of the year. For now, however, China and India have increased their oil purchases in Russia.

OPEC members “will certainly include an economic recession in demand forecasts, but given a faint balance between supply and demand, we do not believe there will be a change in production levels to defend the price,” he said. says David Deckelbaum, Cowen’s senior analyst.

Chinese demand is expected to pick up in the fourth quarter from Covid-19-related blockades, and there is a higher risk of rising crude oil prices beyond the $ 125 level, he says, although “concerns on the slowdown in recessionary demand could moderate these movements “.

Rising inflation has been more worrying as U.S. drivers face record gasoline prices, and Biden is calling for a temporary suspension of federal gasoline taxes. DWS analysts are reassessing the impact of inflation and interest rate decisions by major central banks, but for now, they expect WTI crude to be $ 110 a barrel by the end of June 2023, starting in prices about $ 104 Thursday.

“We still expect to see a wide range of crude oil prices in the future,” Kung says. An agreement with Iran to resume oil production at pre-sanctions levels could replace Russia’s missing barrels, he says, while “the trajectory of demand could also be altered by more aggressive measures by the central bank in world level “.

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