An Oil Price Tug o' War in the Making

Editorial by Geoffrey Lakings for Industrial Info Resources (Sugar Land, Texas)--As was mentioned in this week's IIR Market Scorecard a Tug o' War in the extremes is being entered into. Which market factor will prevail to provide the ultimate price direction? Likely it will be economic in nature, which will in turn provide that much-sought-after clarity on demand.

• As one has seen WTI prices this week trade down back below $80 before recovering and pushing back above. Then was chopping around looking for direction, which now seems to be to the downside if the latest price movement is to be believed.

.

FX Empire WTI Chart

For this market looks to finally be "filling that gap" caused by the surprise OPEC+ announcement -- where 1.6mm bl/d of supply will be pulled from the market -- the weekend before last.

• FXEmpire: Crude Oil Price Forecast -- Crude Oil Market Finally Trying to Fill a Gap: The West Texas Intermediate Crude Oil market fell a bit during the trading session on Thursday, as we are testing the 50-Day EMA almost immediately. There is a huge gap that has yet to be filled, so a lot of traders will be looking to the downside in this scenario. I've been talking about this for a couple of weeks, the fact that OPEC cutting production is not necessarily a bullish sign. True, it takes some supply out of the market, but the reality is that OPEC sees some reason to protect price. The reason of course is going to be the fact that the global economy is slowing down and demand is going to fall through the floor.

And this global economic understanding is preeminent in this very "Tug o' War" being waged in the oil commodity marketplace -- Tightening supply vs. Weakening demand.

• IMF Blog: World Economic Outlook Shows Economies Facing High Uncertainty: Our latest World Economic Outlook forecasts that growth will slow from 3.4 percent last year to 2.8 percent this year. Growth is then expected to accelerate to 3 percent next year.
  
  Risks to the outlook are heavily skewed to the downside, with heightened chances of a hard landing. In a plausible alternative scenario with further financial sector stress, global growth would decelerate to about 2.5 percent in 2023.
  
  Looking further ahead, growth is expected to remain around 3 percent over the next five years. This baseline forecast of 3 percent five years ahead for 2028 makes it the lowest medium-term growth projection since 1990, and well below the average of 3.8 percent from the past two decades.

As this will in turn factor into what the Central Banks decide to do in regards to Interest Rates -- seeking to tame inflation but not dampen economic growth where a recession becomes likely.

For the prevailing thought is the US Fed is targeting another .25 basis point raise upcoming in May; however there is thought there will be a "soft landing on the horizon".

• Yahoo Finance: Fed's Mester sees policy rate over 5% and 'soft landing' on horizon: Cleveland Federal Reserve President Loretta Mester said on Thursday the U.S. central bank still has more interest rate increases ahead of it, while noting the aggressive move to boost the cost of borrowing over the last year to quash high inflation is nearing its end.
  
  "Demand is still outpacing supply in both product and labor markets and inflation remains too high," Mester said in a speech to the Akron Roundtable, a community forum in Akron, Ohio.
  
  "In order to put inflation on a sustained downward trajectory to 2%, I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time," Mester said, referring to the central bank's benchmark overnight interest rate.

That all being said there is still so much economic uncertainty -- which is also highlighted in the IIR Market Scorecard. Uncertainty, which is further ratcheting tensions between IEA & OPEC, and their "Tug 'o War" in how they themselves represent oil commodity fundamentals in their respective monthly reports.

Investing.com: The Energy Report - IEA vs OPEC

And IIR Energy's Hillary Stevenson summarizes her Energy Outlook Report Trifecta -- where she includes EIA.

• A trifecta of supply and demand updates were released last week. The IEA, OPEC, and EIA all forecast rising global oil demand for 2023 between 1.4 and 2.3mn bpd, led by gains in non-OCED countries.
• Rising demand paired with OPEC+ supply cuts could lead to a tight market in H2 2023
• US supply gains could help balance the market.
• BP started operations
at its 140,000-bpd Argos platform in the Gulf of Mexico last week. The new platform is the first for BP since the Deepwater Horizon oil spill in April 2010 and will extend the life of its Mad Dog field.
• Meanwhile, the EIA expects US shale oil and gas production to rise to a record-high in May.

Further speaking on aforementioned tensions, there definitely is some between the Russian Bear and G7 and the sanctions imposed; although one knows "skirting around these sanctions" is indeed happening as the Russian barrel and product still makes it to world markets.

• Forbes: These Five Countries Are Laundering Russian Oil And Selling It To The West: Five countries have expanded imports of Russian oil in the wake of the Ukraine invasion and refined it into products they are selling to countries that have sanctioned Russian oil, according to a report released today by the Centre for Research on Energy and Clean Air (CREA).
  
  Their "laundering" operation is undermining the price cap on Russian oil and fueling the invasion, the analysts say. "This is currently a legal way of exporting oil products to countries that are imposing sanctions on Russia as the product origin has been changed," according to the report. "This process provides funds to Putinʼs war chest."

And of course even though there are creative ways of Russian oil & products to find their way to markets there still remains that nagging question -- as the world steps into "summer driving season" -- Where will Europe get it's non-Russian diesel?

Fortunately, IIR Energy's Hillary Stevenson is providing her insightful "View from the Hills."

• RBN talks about how the new refineries in the middle east will help supply Europe with non-Russian Diesel, but IIR's research team is clocking issues with the start-ups
• Dangote is also having troubles getting started, now pushed to June
• French refinery restarts may help. They have nearly recovered from the strikes. Donges, the only CDU still down, is preparing to restart after fixing an electrical issue which occurred prior to the strikes, according to IIR. (see slide below)
• China is also reporting record-high refinery runs which may also help fuel Europe this summer.

As Stateside pundits are expecting the price at the pump to increase, theStreet.com: Consumers Are Paying More At the Pump, because of the tightening supply expected in the markets; however, again many other factors are at play -- especially as mentioned economic.



So how will this "Tug o' War in the extremes" play out is anyone's guess as the overall crude outlook still remains hazy, but nonetheless let IIR Energy's Dedicated Market Research place the world at your fingertips. Tomorrow's News Today. Ask us! We have Answers!

As your feedback is very important to us. Please let us know if we may provide additional color or answer any other market questions you may have by replying to this note.

Additional IIR Resources:

• IIR Team Email: iirteam@iirenergy.com
• Latest IIR Crude & Products Market Scorecard

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 Trillion (USD).