Crude oil was heading for a third weekly decline after once again failing to find a bid strong enough to force prices above the Brent double top at $86.70. While the short-term global outlook still points to price supportive market tightness, the market has been losing momentum due to the risk of US action to curb prices, a resurgence of Covid-19 cases in Europe and Asia, lower gas and coal prices reducing switching demand as well as OPEC in their monthly oil market report hinting current price levels are starting to hurt demand, especially in countries like India and China.
Following the recent decision by OPEC+ to maintain the current pace of monthly production increases, the US administration has become increasingly vocal in blaming the group for high prices. Very elevated domestic gasoline prices, in some states near record levels, has increased the potential for US action to curb prices, either through a one-off release of Strategic Reserves or more controversially a temporary ban on US crude oil exports.
The U.S. Energy Information Administration (EIA) in its monthly Short-term Energy Outlook (STEO) maintained their forecast of an oversupplied market by early next year, a view that was not shared by Russell Hardy, the head of Vitol Group, the world’s biggest independent oil trader. Speaking online at the Reuters Commodity Trading Conference on Tuesday he said that global oil demand is back to 2019 levels and will exceed those during the first quarter of 2022. Not ruling out $100 per barrel Brent in 2022, he said oil market tightness will continue for the next 12 months with OPEC spare capacity down to between 2 and 3 million barrels per day.
Against these mostly short-term developments the oil market will still be facing years of potential under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand but increasingly also due to lending restrictions being put on banks and investors due to ESG and the green transformation focus.
Whether the short-term trading range in Brent will be $80 to $85 or potentially a deeper correction towards $75.50 will to a high degree be determined by whether the Biden administration pushes though measures to curb prices. A 50-million-barrel release from SPR could trigger a temporary drop in prices, perhaps by as much as five dollars, but overall, we see a limited chance of it having a long-term negative impact on prices.