The fact crude oil futures only recorded a relatively and not unusual price reversal within the established ranges highlights the continued risk of higher prices due to persistent tightness, due to sanctions against Russian shipments and not least many producers struggling to increase production despite the prospect for high revenues at current prices.
We still believe – and fear – that worries about demand destruction will be more than offset by supply constraints. OPEC+ meet today, and already trailing their own production target by 2.7 million barrels per day, the group is expected to rubberstamp another small but illusive production increase, thereby completing the reversal of output cuts made at the start of the pandemic in 2020. What lies ahead for the group will be crucial, but with most producers being close to maxed out, we are unlikely to see a surprise additional supply response.
In the short term, however, we will see a battle between macroeconomic focused traders, selling “paper” oil through futures and other financial products as a hedge against recession, and the physical market where price supportive tightness remains. A battle that for now and during the upcoming peak summer holiday period when liquidity dries out, may see Brent crude oil trade within the established range between $100 and $125 and perhaps the even tighter one between $110 and $120.