Brent crude has been under bearish pressure since early June when the Dated Brent crude price traded as high as USD 128.95/bl.
A sharp drop in refining margins has eased the pressure on light sweet crudes reflecting both weaker oil product demand and more availability. Chinese lockdowns, weakening global manufacturing, higher interest rates and destructive natural gas prices in Europe and Asia have helped to ease oil product demand and have driven the Brent crude oil price lower since mid-summer.
US gasoline demand is down 13% YoY in response to very high prices. Looking at Brent crude yesterday (8 August 2022), it is down 1.6%. It is clear that these bearish forces are still intact.
As pressure eases on light sweet crudes, Bjarne Schieldrop, chief commodities analyst at SEB, believes that oil demand will remain bearish amid weakening macroeconomic conditions and the OPEC+ decision to not lift production:
“Except for possibly more oil from Venezuela and Iran, it looks like OPEC+ has come to the end of the line with little extra supply to offer. Biden recently went to the Middle East asking for more oil; he got next to nothing. OPEC+ decided at its latest meeting to lift its production cap by 100 k bl/d in September with both Russia and Saudi Arabia getting a cap of 11.03 m bl/d. A higher cap comes with no obligation, however, to lift production to that level. So production is unlikely to increase by a full 100 k bl/d in September.
“Saudi Arabia produced 10.8 m bl/d in July. Only twice before has it produced that much (November 2018 & April 2020), and then only briefly. Add the fact that the rig count in Saudi Arabia is down 50% since 2020 and it still hasn’t recovered. So how much spare capacity Saudi Arabia really has is highly questionable. Saudi Arabia last week lifted its September Official Selling Prices (OSPs) to Asia to the highest level ever for several grades. The OSPs are price differentials to the Dubai marker. Saudi Arabia is basically saying to its clients that, yes, they can have Saudi crude oil if they want it but then they really have to pay for it. Alternatively, they should go and buy their crude from someone else. A more natural production level for Saudi Arabia is around 10 m bl/d. With the sharp reduction in drilling since early 2020, it would be a surprise if Saudi maintains its production steady state at 11 m bl/d.
“In its communication to the market after the OPEC+ meeting, the group pointed the finger towards “chronic under-investments in upstream oil and gas over several years”. It stated that it currently has limited spare capacity which needs to be used with care. The group implicitly said that if the world wants more oil it needs to make the oil itself because there is not much more oil to be expected from OPEC+ in the near term except for the possibilities from Iran and Venezuela.”
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