In short, geopolitical risk is still both large and intact, in our view ~Standard Chartered
Story by Andreas Exarheas| RigZone.com | Recent oil price easing could perhaps be seen as a sign of greater maturity in the oil market when it comes to geopolitics, analysts at Standard Chartered said in a report sent to Rigzone last week.
“After jumping at geopolitical shadows and overreacting in 2022, the market has been more stoic in 2024 so far,” they noted.
Alternatively, the fall in prices could be seen as a sign of increasing immaturity in relation to geopolitics, the analysts stated in the report.
“This is a market that does not price geopolitical risk unless there is something observably on fire right now,” they added.
In the report, the Standard Chartered analysts revealed that they think “the truth is probably somewhere in the middle of those two interpretations”.
“It may be unwise to attempt to extract a convincing geopolitical narrative from recent oil market reaction; we think it has always had difficulty in pricing any relatively slow-moving geopolitical narrative correctly,” they said.
“We think it is reasonable to conclude from the price fall that traders are less concerned than before about short-term supply risks; however, we do not think anything can be concluded about the market’s view of any permanent shifts in geopolitics or on whether the longer-term risk has been elevated,” they added.
“In short, geopolitical risk is still both large and intact, in our view,” they went on to state.
The analysts highlighted in the report that their view is that longer-term supply risk has become elevated by the events of the past seven months.
“The long-running dispute between Iran and Israel has, up to now, been largely covert, hardly acknowledged by either side, and often carried out through proxies,” they said.
“That confrontation is now more explicit and direct; Iranian red lines have been redrawn in a way that will likely make the diffusion of future tension harder, and there is no likely resolution of the tension in sight,” they noted.
“Further, we do not think U.S. policy towards Iran oil exports will remain quite as circumspect as it currently is, regardless of the result of November’s presidential election,” they added.
The analysts stated in the report that the election may influence the timing of the next swing down in Iranian exports but added that they think increased pressure on Iran is highly likely in any event.
“The latest additions to U.S. secondary sanctions on Iranian oil exports may add to the instruments available, although we note that existing U.S. policy instruments were enough to drive Iranian exports down to close to zero in late 2020 before the international context, and the associated implementation policies, changed,” the analysts said.
Market Fundamentals
The reduced market focus on Middle East developments is likely to bring fundamentals back to the fore, the Standard Chartered analysts said in the report.
“Short-term spreads, which were key to price progression in Q1, are likely to remain so in Q2,” they added.
“Our balances imply that April will show the typical shoulder-season characteristics, with a tendency towards inventory builds before demand picks up for the rest of the quarter,” they continued.
“Our model shows a small 74,000 barrel per day global inventory build in April, significantly less than the 2.2 million barrels per day build in April 2023 and the 1.4 million barrel per day build in April 2022,” they said.
“Nevertheless, it is likely to feel like a significant relaxation in the physical market after the strong counter-seasonal Q1 inventory draws. However, we forecast global oil demand will pick up strongly in May and June, exceeding 103 million barrels per day for the first time in May (at 103.15 million barrels per day) and then surpassing that record with 103.82 million barrels per day in June,” they went on to state.
The analysts highlighted in the report that they expect global inventory draws of 1.53 million barrels per day next month and 1.69 million barrels per day in June, which they said should tighten physical spreads significantly.
“While our balances indicate there is room for at least one million barrels per day of extra OPEC output in Q3 without increasing inventories, we think the latest pull-back in prices re-opens the question of the timing of any output increases,” the analysts noted.
“The next key ministerial meeting is just six weeks away; we think that if the market is still trading weakly then and market concerns about demand and the macroeconomic environment persist, ministers are very unlikely to want to add oil back onto the market immediately,” they added.
The analysts said in the report that they think the next few weeks will be key in determining how tight Q3 will be.
“We forecast a 1.6 million barrel per day Q3 stock draw if there is no increase in OPEC output, compounding the price effect of an H1-2024 draw of 1.1 million barrels per day,” they added.
Oil Price
In the report, the Standard Chartered analysts revealed that the company’s machine learning oil price model – SCORPIO – indicates a week-on-week increase of $1.07 per barrel for Brent settlement on April 29.
“The entire Brent curve remains higher year on year, although the gaps have narrowed, particularly mid-curve,” they added.
The analysts highlighted in the report that front-month Brent settled at $87.00 per barrel on April 22, “having reached a three-week low of $85.79 per barrel intra-day on the same day”.
“The week-on-week fall was $3.10 per barrel, larger than the $0.94 per barrel fall that had been indicated by SCORPIO,” they added.
Standard Chartered projected in the report that the ICE Brent nearby future crude oil price will average $94 per barrel in the second quarter of this year, $98 per barrel in the third quarter, $106 per barrel in the fourth quarter, $107 per barrel in the first quarter of 2025, $103 per barrel in the second quarter, and $111 per barrel in the third quarter.
The company expects the commodity to average $109 per barrel overall in 2025, $128 per barrel overall in 2026, and $115 per barrel overall in 2027, according to the report.
In a separate report sent to Rigzone last week, Ole R. Hvalbye, a Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), said, “Fundamentals predominantly influence global oil price developments at present”.
“Geopolitical ‘risk premiums’ have decreased from last week, although concerns persist, highlighted by Ukraine’s strikes on two Russian oil depots in western Russia and Houthis’ claims of targeting shipping off the Yemeni coast,” Hvalbey said in that report.
“With a relatively calmer geopolitical landscape, the market carefully evaluates data and fundamentals. While the supply picture appears clear, demand remains the predominant uncertainty that the market attempts to decode,” he added.
In a report sent to Rigzone on April 20, analysts at J.P. Morgan said their base case for oil “remains a $90 Brent through May and $85 in 2H24”.
To contact the author, email andreas.exarheas@rigzone.com
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