Even though oil prices are losing a few cents to the dollar today, the overall sentiment has lifted since yesterday and the market should see the forest for the trees, as overall market conditions remain bullish and – under the current oil supply status quo – oil valuation is on track for further ascent.
If the API forecast of crude stocks declining last week gets confirmed by EIA later today, the development is another bullish card for the market to further boost prices and fuel the rally.
Meanwhile, the Biden administration removed its proverbial finger from the strategic petroleum reserve release button.
Yesterday’s EIA STEO confirmed what we have been warning about for some time now – that a much looser supply market awaits in 2022 as OPEC+ tapering adds up, US shale is poised for growth, and a possible re-emergence of Iranian barrels as the political will behind an Iran nuclear deal remains intact.
The API data, if validated later today, underpins the broader gains in oil prices in early trading. The gradual tightening of inventories as demand has sprung back from the worst of the Covid-19 restrictions has not only been occurring in the US, but also in China, where stocks are reportedly thinning.
China, also a net oil-importer, has been putting similar pressure on OPEC+ to put more supply on the market as the country faces fuel shortages. Independent refiners have had to cut runs as a result of power rationing amid the greater energy crunch, which has lowered the crude output capacity, and thus overall demand for crude.
The wave of supply expected in 2022 will bring more oil to the market but still crude inventories are overall expected to continue to fall, albeit at a slower pace than seen earlier this year.
In March 2022, as the oil demand lull sets in seasonally and as the natural gas crunch should subside, we anticipate the possibility of storage builds and a much-needed surplus in the oil market again.
The US does have another tool at its disposal to quell raising energy prices – a stronger dollar triggered by monetary tightening.
Today’s US inflation data, which on an annualized basis is expected to come in at more than double the Fed’s target inflation rate of 2%, will again beg the question of just how transitory inflation is, and how much longer policymakers can fend off raising interest rates.