Weaker US capital goods orders added to signs of moderating activity in the world’s largest economy, while indications that Russia was able to export more despite an EU embargo and oil price cap further dampened sentiment.
Over the past two weeks, Brent crude has lost nearly 11%, erasing the gains from the OPEC+ surprise announcement of production cuts at the start of this month. However, we continue to hold a positive outlook for oil and expect prices to rebound in coming months as markets refocus on fundamentals.
Russian output unlikely to be sustained. Recent media reports suggested that oil loading from Russia’s western ports in April could be the highest since 2019, while both India and China have ramped up purchases of Russian oil. Moscow has also managed to sell more to buyers from Turkey, Africa, the Middle East, and Latin America. However, we view this as a structural shift in trade routes following the international oil sanctions on Russia. With the country agreeing to keep its output at the current reduced level, we believe oil coming out of Russia should stay limited.
Inventories continue to drop. US crude oil inventories fell further, by 5.1 million barrels in the week to 21 April, far exceeding analysts’ expectations for a 1.5 million-barrel drop, according to the latest data from the Energy Information Administration. Gasoline stocks also fell more than expected, by 2.4 million barrels, as demand for the motor fuel picked up ahead of the peak summer driving season. This came after large on-land inventory drops recently across the US, Europe, Singapore, Japan and Fujairah in UAE. We believe the voluntary production cuts by nine OPEC+ members starting next month should tighten the oil market further.
China’s higher oil imports should add a tailwind to prices. China’s crude oil imports in March jumped 22.5% from a year earlier to the highest monthly level since June 2020, as the country’s economic activity continues to rebound. With China’s GDP growth expected to be at least 5.7% this year, we forecast Chinese oil demand to rise by 0.8mpbd in 2023. This would bring global oil demand to record levels above 103 million barrels per day in the second half.
So, we continue to rate oil as most preferred in our global strategy. With CIO forecasting Brent crude to reach above USD 100/bbl, we see opportunities in longer-dated Brent oil contracts, or selling Brent’s downside price risk over the next six months. Investors with higher risk appetite can also gain exposure through Brent crude’s first generation indices to benefit from solid roll returns on top of the expected spot appreciation. Our oil view forms part of our positive outlook for broad commodities, and we recommend an active investment approach.
Main contributors - Mark Haefele, Daisy Tseng, Giovanni, Staunovo, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Oil weakness should reverse on tight fundamentals, 27 April 2023.