The oil price rally is taking a breather today as US crude stocks unexpectedly rose last week, a development the market was not expecting as weeks of continuous draws have been fueling the price rise.
Despite the build, the overall trend of massive draws over the past weeks has still left US storage levels low enough that there is still an overarching bullish sentiment when it comes to US onshore crude stockpiles.Â
Lower price pressure is also tied to the recent rolling of the Brent futures contract, when some market participants decided to cash out instead of gambling on an extremely tight November.
As natural gas and electricity prices reach new heights, we observe a pronounced, but quieter, strengthening in fuel oil and distillate cracks, especially in Asia.
Additional diesel demand for backup power generation has in the past driven crude prices to strong highs, especially during 2008 when China was short of electricity and diesel cracks traded above $40 per barrel.
We are currently nowhere near this level, but record-high LNG import prices in Asia may lead to additional diesel for backup generators.
We find it quite likely that oil demand for the power sector, primarily in key countries in Asia with ample liquids power generation capacity, can see an increase of around 500,000 bpd over the next three months on top of the baseload run rate.
And while we are not making any definitive weather calls on winter yet, if a particularly cold winter hits the Northern Hemisphere, heating demand could jump by an additional 400,000 bpd.
The ongoing rally in crude, distillates and the upside demand potential of nearly 1 million bpd has led us to revise up our short-term price view, in data available to clients.
We also revised our full-year 2022 Brent price higher until we know more about how the initial effects of the winter energy crisis will more exactly fan out across products demand and inventories.
The next price signal will come from Vienna and OPEC+. With a tighter than usual supply picture that would normally be warranted in an $80 per barrel Brent environment and with demand seemingly poised to cross the 100 million bpd mark on a more expedited track as Covid-19 restrictions are lifted, the OPEC+ policy decision from the 4 October meeting warrants extra scrutiny.
The group will need to decide on a supply plan – either keeping its conservative 400,000 bpd planned incremental increase which wouldn’t dramatically shift the needle on oil prices, or to call on some key countries such as Saudi Arabia with sizeable spare capacity to step up production and normalize prices back towards the mid $70s.
Rystad Energy expects the group to take a wait-and-see approach, not least because the group has yet to demonstrate its ability to ramp up oil supply quickly. September 2021 OPEC+ oil supply, for example, likely fell about 1 million bpd lower than the target production level, as some countries are still falling short of their allotted production quotas.Â
The knock-on effect on tighter balances in the coming months warrants a more bullish view, but the OPEC+ reaction  to high prices is really the variable that will define the direction of the oil price.