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Oil poised to rebound to $125 amid tight supplies

UBS analysts said fundamentals point to higher prices as spare capacity is ebbing and inventories are at multi-year lows.

Oil prices will rebound to $125 in the coming months amid tight supplies, dwindling spare capacity, and low oil inventories, according to a forecast by analysts at UBS.

In a research note, UBS analysts said fundamentals point to higher prices as spare capacity is ebbing and inventories are at multi-year lows.

Responding to Saudi comments to the effect that Opec+ could cut production at any time, citing a disconnect between fundamentals and oil futures prices, the Swiss bank also noted coming disruption to oil markets when a European ban on Russian seaborne oil imports goes into effect in December.

"The European Union intends to cut its dependence on Russian waterborne crude imports by December 5 and refined products by February 5. This will likely cause some disruptions as Russian oil imports to the EU amounted to 2.8m bpd in July,” Giovanni Staunovo, strategist at UBS wrote. “This suggests to us that there is a desire to defend oil prices to stay above the level of $90/bbl. Prices are lower than a few weeks ago as market participants remain concerned that rising interest rates and soaring energy prices will weigh on oil demand,” said Staunovo.

“We continue to advise risk-taking investors to add long positions in longer-dated Brent oil contracts or sell Brent’s downside price risk. Earlier this week, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said extreme market volatility and the lack of liquidity in the oil market are disconnecting futures prices from fundamentals, and that “Opec+ has the means to deal with market challenges, including cutting production at any time and in different forms,” Staunovo said.

Since the Saudi minister’s comments, oil prices have risen back above $100 per barrel. Prior to the prince Abdulaziz’s comments, oil prices were falling as the market weighed the impact of the potential return of Iranian barrels should a revival of the 2015 nuclear deal be agreed upon. The market has also been factoring in slowing economic growth as a bearish weight.

UBS strategists said an end of releases from strategic petroleum reserves in OECD countries would end up taking more than 1.0 million barrels per day off the market beginning in November. This would lead to “tighter markets at the end of the year,” UBS wrote.

Vijay Valecha, chief investment officer, Century Financial, said the US has reported a 3.3-million-barrel decrease in crude oil Inventories which implies a greater than expected crude demand and encouraged a bullish market.

“On the charts, crude Brent oil-October contract could see near support near $100 while resistance can be at $102.7 and $103.6 as per pivot point.”

On Wednesday, reports emerged that Iran had received responses from the United States regarding Tehran’s concerns related to the final draft of the nuclear deal.

In the meantime, Oanda analyst Crain Erlam said Saudi Energy Minister’s comments may make the chance of a move back below $90 in the near-term hard to come by unless a nuclear deal is agreed upon and Opec+’s appetite for cuts put to the test.

The Swiss bank noted that spare capacity is below 2.0 mbpd, and oil inventories stand at a multi-year low. The European Union intends to cut its dependence on Russian waterborne crude imports by 5 December and refined products by 5 February. “This will likely cause some disruptions as Russian oil imports to the EU amounted to 2.8mbpd in July. Also, ending sales from the strategic oil reserves of OECD countries will remove more than 1mbpd of supply from November, pointing to tighter markets at the end of the year.”

In a sharp contrast to the bullish UBS forecast, brokerage Citi said oil prices could fall to $65 a barrel level by year-end and potentially to $45 by 2023-end. The scenario assumes an absence of any intervention by Opec+ and a decline in short-cycle oil investment.

A report quoted Citi as saying that it looks like in 2022 and 2023, Russian crude exports may remain robust even if refined product exports may fall. That said, further global crude oil demand weakness should spell higher inventories, which could weaken crude prices going ahead, Citi said. The brokerage sees Brent at $99 per barrel in the third quarter of calendar 2022 and at $85 a barrel in the fourth quarter. Overall it sees Brent price to average at $98 a barrel in 2022 and $75 in 2023. In the case of WTI crude, Citi forecasts it to average at $95 per barrel in 2022 and $72 per barrel in 2023. It forecasts WTI crude to average $94 per barrel in the third quarter and $81 per barrel in the fourth quarter.

The world oil demand is projected to average 100.3 mb/d, which is 0.2 mb/d lower than the previous estimates and approximately 0.1 mb/d higher than 2019. Crude oil markets have been gripped by many factors including recession, demand destruction, supply disruptions and rock-bottom spare capacity to name a few. It looks like volatility is here to stay in oil markets for a good period of time, Citi said.

— issacjohn@khaleejtimes.com