Weak economic activity weighs on oil prices

It is expected to remain oversupplied, likely with slight oversupply for the rest of the year, which will weigh on crude prices.

We must bear in mind that in the last three months 1.6 million barrels of oil/day have been added and we have returned to the 2019 average of 100.3 million/day. The three largest suppliers have contributed to this: the US, Saudi Arabia and Russia. Supply has reached 10.6 million barrels/day, fully in line with the announced quotas, compared to 8.2 million at the beginning of 2021.

Thus, in the US it reached a new historical maximum in August, at 9.8 million barrels/day. Furthermore, Saudi Arabia has no longer curbed supply like during the post-Covid period. For its part, the data from Russia should be taken with caution. According to the US Energy Information Administration, international sanctions already reduced Russia’s supply by one million barrels/day in April. Since then, however, Russia has returned to producing eleven billion a day, close to its pre-war levels. Other non-OPEC+ producers have been supplying above pre-pandemic levels: Canada 0.3 million above their 2019 average and both Norway and Brazil 0.2 million more.

Now, in the coming months, as spare capacity and supply elasticity are limited. It should be noted that the increase in shale oil production in the US so far this year has been helped by the large number of wells drilled but not completed accumulated during the Covid-19 closures. Companies in the sector, to maintain the current pace, would have to increase drilling activity, but so far industry executives seem reluctant and have maintained investment discipline, focused on shareholder returns. In addition, the contributions involving the use of the US strategic oil reserve are likely to end around this November, when 200 million barrels will have been released for the year. All in all, global oil supply may stabilize near current levels in this second half.

See also  The merger of Sabadell with BBVA, more beneficial than with Bankia

Meanwhile, global oil demand has remained weak, shrinking for the past five months. The current global economic slowdown seems to be the main cause. Demand has been particularly weak in developed economies, with 2.7 million barrels/day less through August, and recently in emerging economies, by 0.9 million, especially due to the Chinese economy.

This situation is unlikely to change soon as the US economy is expected to weaken. The outlook for Europe looks even worse, due to the energy crisis and tighter financial conditions. In addition, in China, the crisis in its real estate sector continues to be a major drag and a change in its “zero Covid” policy does not seem imminent.

So we have revised down the global GDP growth forecast to 2.9% this year -from 3.3%- and to 2.7% in 2023 -from 3%. It implies one for the next few months, barring a temporary rebound if there is a progressive switch from gas to oil use at European power plants.

However, if oil demand remains weak for an extended period, OPEC+ is likely to move quickly to cut supply, as Saudi Energy Minister Abdulaziz bin Salman indicated. Such a decision is easy to make, as most members cannot meet their current dues. Only the largest producers, Saudi Arabia, Iraq, the United Arab Emirates and Kuwait would have to cut their production.

So there may be a bout of temporary oil price weakness in the coming months with Brent falling towards $75-$90, followed by a rally on possible further OPEC+ supply cuts and the prospect of Western economies start to recover in the second quarter of 2023. However, depending on the strength of this recovery, the corresponding oil price rebound may prove to be modest. Still, while the Kremlin has warned it will stop selling oil to countries that impose price caps on Russian energy resources, we have revised our year-end forecast for Brent oil down to around $100 a barrel. .

Loading Facebook Comments ...
Loading Disqus Comments ...