Yesterday may have been a day of profit taking by the most impatient market participants but in tight market conditions that doesn’t last and supply tightness – in conjunction with falling storage levels – helped prices rise again.
The upside risk to oil prices is real in the very near-term as there is little incentive to go short amidst a global energy crunch where OPEC+ is quietly sitting on the supply sidelines.
Prices started lower in response to the prospect of lockdowns in Russia but the upward sentiment brought back gains and remains steadfast. Especially as winter approaches, the demand upside in power and heating is already underway, in particular in Asia.
The volatile supply chain and energy landscape at present doesn’t rule out a brief spike to $100 oil, as prices may just need to go higher before the underappreciated negative demand lag effect in the market kicks in and brings indices lower.
This week’s news, first of Russia “discussing” going back into lockdown and then announcing an extended holiday week from 28 October to 7 November, offer a bearish pillow for oil prices as people are expected to commute less.
Rystad Energy estimates that Russia’s road and aviation fuels demand in October at about 1.3 million bpd, which is still below the 1.4 million bpd to 1.5 million bpd levels seen in October 2019 before the pandemic, and far below the summer seasonal peak of about 1.7 million bpd.
With the new restrictions, we expect to see downward pressure on demand for gasoline and diesel, but with an extended holiday, domestic aviation demand could get an unexpected boost.
By attempting to disrupt the disease transmission link now, officials may be targeting to have lockdowns lifted before the New Year holidays.
Even with about 30% of employees at companies working remotely and mandatory vaccination in government agencies, Russia is still struggling with record high case levels of Covid-19, and will certainly not be the only country that needs to re-trace lockdown measures as the autumn season accelerates the virus.
While we expect oil demand to near 99.9 million bpd in 2022, another wave of strict lockdowns on a global scale would have the potential to swipe away 2.2 million bpd of this growth – although not our base case.
The most interesting piece of news in the beginning of next week will be how US storage levels develop.
Last week’s draw and its depth came as a surprise to the market that expected finally a build of inventories, which didn’t materialize. Another draw would suppress the availability of oil even further and ring even more alarms for market participants and the OPEC+ group.