By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia
Brent has moved $1 higher despite API data showing a 1.85M bbl rise in oil inventories; data which was compounded by rises in both gasoline (+1.82M bbl) and distillate (+3.38M bbl) inventories. Yesterday, oil’s inverse relationship to the U.S. dollar led moves across the energy complex, although there was notable strength observed in NYM Heating Oil versus RBOB Gasoline, as exports of diesel to Europe reached 1.12M bbd in the first week of June – the highest since Vortexa started tracking shipping records in 2015. United States refinery utilisation is approaching five-year highs, according to the EIA; this threatens further tightness in oil product markets as the peak summer consumption season continues, and hurricane season approaches. Meanwhile, the U.K. is considering recommencing the Cambo Oil Field project, which had been blocked on environmental grounds in December.
It therefore looks unlikely that OPEC+’s output will keep pace with the rise in demand in 2022. The possible consequences of this include a steepening of the backwardation in oil futures; the 2nd Brent spread, which currently trades at $2.35, could sustain levels above $3.25. Such a level has only ever been breached in March 2022, amid evaporating liquidity and a flight-to-front-month as Western nations scrambled to procure oil in the wake of the Russian invasion of Ukraine. We concur with bullish flat-price assessments by Goldman’s and Morgan Stanley moving towards the end of this year. However, another major outbreak of COVID in China poses a substantial challenge to achieving price levels above $140 as the Government continues to pursue a zero-tolerance approach that has the potential to heavily impact oil demand in the second half of 2022.
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