The energy sector finished the second quarter as the second worst performer among U.S. market sectors, posting a -4.5% return compared to a 4.6% gain by the S&P 500 as oil demand fears dominated for most of the term. The energy sector has now slipped to 4th in year-to-date sector rankings with an 8.6% return compared to a 15.5% gain by the broad-market benchmark. Thankfully, the oil price rally is back on track with the September Brent contract climbing to 86.60/bbl on 1 July, the highest front-month settlement since 30 April and $10.24/bbl above the 3 June low.
And now Wall Street is growing increasingly confident that the rally has fresh legs to run longer. According to commodity analysts at Standard Chartered, the Brent rally is sustainable well past $90/bbl, largely based on fundamentals. StanChart has projected that global oil markets will record a deficit in Q3 that will spill over into Q4, putting further downward pressure on inventories. In the near-term, StanChart’s proprietary SCORPIO machine-learning model is predicting a w/w increase of $1.70/bbl to an 8 July settlement of $88.30/bbl, with the current narrow Brent-WTI and Brent-Dubai spreads as well as price technical indicators and oil price levels being the most significant bullish catalysts.
StanChart notes that oil market sentiment turned extremely bearish in April with speculative funds moving rapidly to the short side of the market. This negative sentiment shift was largely driven by weak U.S. transport fuel demand as per reports by the Energy Information Administration (EIA) weekly data. Media houses did not help with the narrative, with some talking about multi-decade demand-lows and predicting an imminent collapse of the U.S. economy. To wit, the EIA estimated that U.S. gasoline demand declined 4.4% Y/Y in April, triggering a rapid pivot by speculative funds towards the short side of the market. However, StanChart quickly pointed out that there appears to be a systemic downwards bias in estimates of U.S. fuel demand, with actual gasoline demand exceeding estimates in 22 of the past 24 months, while distillate demand (mainly diesel) has been revised higher in all of the past 24 months. StanChart predicted that EIA estimates for April gasoline demand were too low with actual demand likely to surprise to the upside.
Well, StanChart was recently vindicated, with April gasoline demand turning out to be at a two-month low rather than a two-decade low. On 28 June, the EIA published its Petroleum Supply Monthly (PSM) Report that contained large upward revisions for gasoline, distillates (mainly diesel) and jet fuel. The y/y demand changes were revised to -1.5% from -4.1% for gasoline, to -2.0% from -9.2% for distillates and to +5.4% from -1.0% for jet fuel. StanChart notes that the combined upwards revision in transport fuel demand clocked in at 602 thousand barrels per day (kb/d), exceeding the upwards revisions of 547 kb/d and 487 kb/d made to the initial September and November 2023 data, respectively.
On the supply side, PSM revised April U.S. crude oil production to 13.248 mb/d from the 13.1 mb/d shown in the weekly data, good for a 72 kb/d m/m increase. This implies that April output was 47 kb/d below November 2023’s all-time high. Overall, StanChart points out that U.S. crude production has increased by just 248 kb/d over the past 53 months.
Interestingly, the natural gas markets have been moving in the opposite direction to oil, with the big rally that kicked off in February lately reversing course. European natural gas futures have dipped to €32.77 per megawatt-hour, nearing their lowest point in six weeks while Henry Hub gas prices have slipped from a 5-month high of $3.13/MMBtu in June to $2.43/MMBtu currently. After a slow start to Europe’s gas injection season, the rate of increase in inventories has finally returned close to historical averages. StanChart notes that w/w changes in June clocked in at more than 1 billion cubic meters (bcm) below the five-year average; however, that gap has now narrowed to just 0.2 bcm. According to Gas Infrastructure Europe (GIE) data, EU inventories stood at 89.94 bcm on 30 June, good for a 0.43 bcm y/y increase and 12.53 bcm below the five-year average.
Meanwhile, Hurricane Beryl is currently wreaking havoc in the southeast Caribbean. However, Beryl seems unlikely to pose a direct threat to key U.S. Gulf upstream and downstream infrastructure with most models projecting an initial landfall on the Yucatan peninsula and then a second landfall by a greatly weakened system in northern Mexico. That said, Beryl is the earliest recorded category 5 Atlantic hurricane, a fact that has led to forecasts of a very active hurricane season. StanChart has predicted that this is likely to keep the market on edge for at least the next two months.
By Alex Kimani for Oilprice.com
