Will We See Another Oil Price Breakout Soon?

With Russia’s invasion of Ukraine looking likely to transition into an extended war of attrition in the east of Ukraine, oil supply jitters in the market have cooled off considerably. Also, it appears that recent SPR releases–casually dismissed by many experts as a mere band-aid–are having the desired effect. The oil price bull run has hit the skids after President Biden announced that the US would release 180M barrels from the Strategic Petroleum Reserve over the next six months in the largest release in SPR history, while threatening to impose penalties on domestic drillers for failing to use federal oil permits. The International Energy Agency’s 31 member nations plan to release 120 million barrels from their emergency oil reserves, including 60 million barrels from a previously announced drawdown from US stockpiles, marking the second coordinated release of emergency oil from the IEA in just over a month.

Front-month Brent has failed to achieve a run of two successive days of higher settlements in the past three weeks and only managed a higher intra-day high on two days over the past two weeks. Front-month Brent settled at USD 98.48 per barrel on 11 April, aw/w fall of USD 9.05/bbl and just USD 1.64/bbl higher than on 23 February, the day before Russia invaded Ukraine while WTI fell USD 8.99/bbl w/ w to settle at USD 94.29/bbl on 11 April.

Oil Sanctions Still Coming

In a previous oil price update issued a few weeks ago, commodity experts at Standard Chartered had warned that the market could soon facing a 3mb/d supply deficit partly due to self-sanctioning and also due to the possibility of a ban on the importation of Russian oil. That certainly appeared within the realm of possibility considering the global outrage that ensued after grim images appeared from the town of Bucha near Kyiv, including a mass grave and bound bodies of people shot at close range.

Related: China And The US Are Battling For Influence Over Iraqi Oil

But StanChart has now toned down its bullish outlook a bit. The experts are now saying that whereas sanctions against Russian oil are likely to remain at the top of the EU policy agenda in the coming months, a complete ban is unlikely.

Rather, StanChart says the EU is likely to consider various intermediate measures, including tariffs and the use of escrow funds in such a way that Russia is unable to access all its export income.

Still, experts can’t seem to agree on the Russian outlook.

StanChart has forecast ay/y decline in the annual average of 1.61mb/d, good for a 3mb/d sequential fall from pre-invasion levels; the IEA expects Russia’s crude output to decline 1.65mb/d, the EIA expects growth of 56kb/d, OPEC Secretariat has revised Russian output lower by 530kb/d, although it still forecasts an increase of 433b/d, lower than the OPEC+ output cut unwinding schedule.

The latest EIA weekly data was mildly bullish. Crude oil inventories rose 2.42mb to 412.37mb, leaving them 85.94mb lower y/y and 66.24mb below the five-year average. The w/w change in the crude oil balance was 493kb/d in the direction of lower inventories, primarily due to a 705kb/d increase in crude oil exports; however, this was more than offset by a 1.332mb/dw/w swing in the crude oil adjustment term in the direction of higher inventories. The EIA’s estimate of US crude oil supply rose 0.1mb/dw/w to 11.8mb/d. The EIA forecast is that crude oil output will average above 12mb/d in July 2022 and will move above 13mb/d in August 2023 to a new-all time high (the current monthly average high of 12.966mb/d was set in November 2019 ). Related: Russia Ready To Sell Oil At Any Price

The American Petroleum Institute (API) reported crude inventories rose 7.8mb, relative to the DOE expectation for a build of 0.9mb on the week. Crude inventories at Cushing rose 0.4mb on the week, according to the API. API reported gasoline inventories fell 5.1mb, relative to the DOE expectation for a draw of 0.4mb on the week. API reported diesel inventories fell 5.0mb, relative to the DOE expectation for a draw of 0.5mb on the week. In total, API showed a draw of 2.3mb in oil and oil products on the week, relative to the DOE expectation for flat week on week inventories. The API figures are bullish, relative to DOE expectations.

Meanwhile, drilling activity in the US shale fields is gradually gathering momentum.

The US oil rig count rose by 13 w/w to a two-year high of 546, according to the latest

Baker-Hughes survey. The oil rig count has added 51 over the past 10 weeks compared to 34 over the previous 10 weeks. Texas accounted for most of the latest w/w increase in oil drilling activity, with the state-wide oil rig count gaining 10 w/w to 305. Among the Permian sub-basins

Delaware Basin activity rose by two to 169 rigs, Midland Basin activity rose by six to 131 rigs, and other Permian activity rose by a single rig to 30 rigs. The US gas rig count rose by three w/w to a 29-month high of 141, with gas rig count by the Haynesville field hitting a nine-year high of 70 rigs.

By Alex Kimani for Oilprice.com

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