Oil markets are much tighter than oil prices suggest

Oil prices have continued trading in a narrow range in the new year with fears about weak fundamentals and the threat of a recession outweighing geopolitical risks. Last week, Commodity analysts at Standard Chartered argued that oil fundamentals were in better shape than the market was giving it credit for, and the market is heavily discounting geopolitical risks.

This week, Standard Chartered is back again, noting a sharp improvement in oil balances in the current year compared to 2022, suggesting the market is much tighter than current prices might imply.

According to StanChart, the global oil surplus we are currently witnessing is due to seasonal weakness in the month of January; however, the surplus this time around is much smaller than the average over the past two decades.

StanChart notes that there’s been a January inventory draw in only three years since 2004, with the first month of the year averaging a build of 1.2 million barrels per day (mb/d). January 2023 recorded a mega-surplus to the tune of 3.4 mb/d; the third largest surplus in any month over the past 20 years with only two months at the start of the pandemic posting bigger numbers. This year’s surplus appears to be significantly smaller than the average, with StanChart putting it at just 0.3 mb/d.

Even better for the bulls, StanChart has predicted that this surplus is transitory and will flip into a 1.6 mb/d deficit in February. The Energy Information Administration (EIA) is even more bullish and has forecast a 2.3 mb/d deficit.

The improvement in the global oil balance is reflected in U.S. weekly data. StanChart points out that the first five readings from its proprietary oil data bull-bear index in 2023 had two that were ultra-bearish while three were highly-bearish. In contrast, the first five readings of the current year have run neutral, mildly bullish, bullish, highly bullish and mildly bullish with the four-week average showing a strong upwards trend. The latest EIA release is mildly bullish, while StranChart’s bull-bear index has improved +22.4.

The commodity experts have reported that U.S. crude output has fully recovered to 13.3 mb/d after the recent freeze-related fall; however, the analysts have predicted there’s little scope for further increases for the rest of the year. Standard Chartered says there will be very limited incremental growth in U.S. crude oil supply in 2024, with growth expected to sharply decelerate and even turn negative in December 2024 from above 1.2 million barrels per day (mb/d) in December 2023.

The EIA is even more pessimistic on U.S. crude production, and has predicted U.S. supply growth will turn negative as early as September.

Sources: Standard Chartered Research

JP Morgan: Crude oil to rise another $10 by May

There’s more good news for the oil bulls. A growing number of analysts are saying oil prices have limited downside at this juncture and have forecast an oil price rally as the months roll on. According to J.P. Morgan, the oil market outlook “continues to project a tightening market with prices rising from here by another $10 by May.” The JPM forecast assumes that OPEC+ leaders will unwind 400K bbl/day of cuts from April and has assigned no risk premium from the Middle East turmoil. JPM says whereas OPEC’s implementation has been “ambiguous” in the first month of new cuts, crude shipments on a 30-day moving average basis are down 1.3M bbl/day from the October peak. Meanwhile, current data suggest an improving global economy, with observable crude inventories having steadily drawn down over the last month in pivotal markets in the U.S., Europe, Japan, China and Singapore. Meanwhile, data at the beginning of the current week showed larger than expected drawdowns in gasoline and distillate inventories, further supporting the bullish thesis.

Regarding energy stocks, Bank of America analysts have identified stocks that have high idiosyncratic risk, meaning stocks where fundamentals could dramatically improve. According to BofA, ‘‘… using long-short stock selection strategies, based on earnings growth, return on equity, and analysts’ outlooks, based on EPS revisions, would have generated more alpha within the idiosyncratic universe, less within the macro universe.” In the energy sector, BofA has picked Phillips 66 (NYSE:PSX), Exxon Mobil Corp. (NYSE:XOM) and Marathon Petroleum Corp. (NYSE:MPC) as the stocks with the highest idiosyncratic risk.

Meanwhile, in a technical analysis report, Oppenheimer has unveiled one buy and one sell ideas, and has recommended buying Par Pacific Holdings Inc. (NYSE:PARR) and selling Nabors Industries Ltd. (NYSE:NBR).