There’s a stronger belief today that the supply-demand equation in oil will tighten
as we move further into Q3.
Real-time data from China has shown a slight uptick in demand in recent weeks, which offsets the disappointing downtick we saw in mid-June. This marks the end of a worrying downtrend in Chinese demand, even though economic indicators from the country are bearish rather than bullish. However, we must remind ourselves that the Chinese market is still growing. Combustion engine sales are still rising. The numbers for diesel are particularly interesting, as demand for this product has been holding up well. China is also not as dependent on international markets as it used to be and has a self-sustaining domestic economy. PMI indices for the manufacturing sector are hovering at numbers that are not too disappointing compared to expectations.
Why was the initial market reception to the OPEC+ plan negative?
Investors were presented with multiple targets that OPEC+ might miss. However, this was quickly followed by reassuring communications from key producers. For example, some countries that had statistically overproduced confirmed to the media that they would correct these figures and rein in production to restore the balances pledged by OPEC+. This demonstrated solidarity and cohesion among the member countries, calming market fears of discord.
Is there room for OPEC+ to raise output by 500, 000 b/d in Q4?
We should note that there’s also a call to be made on non-OPEC production, with a lot of talk about the substantial volumes coming out of Guyana and continued investment in the Brazilian deepwater projects, as well as the Gulf of Mexico. But OPEC+ should be happy with current prices, given the excess supply cushion or spare capacity. My suspicion is the market is bedding in the announced increases for Q4 as there’s no reason to believe OPEC+ won’t proceed. They will only make adjustments if they see a country struggling to achieve its numbers due to disruptions like weather or insufficient investment.
Will we see sanctions on Russia bite harder in H2?
A few destination countries in Asia, which had been accepting Russian-origin blended barrels from places like the Middle East, have ceased to do so due to reasons such as banking channels. Another significant development is the increasing discussion around Russian LNG. This has been exempt from sanctions so far, to avoid fueling more volatility in energy commodities in Europe, particularly natural gas. But there is an increasing perception that not allowing Russian gas into these markets will no longer have the previously feared inflammatory effect.