Forget June Plunge; Oil Back on High Octane from Supply Squeeze

© Reuters.

By Barani Krishnan

AiVIF.com -- A month can seem like a long time ago on the oil market.

Crude prices flew higher as trading began for July on the back of fresh supply scares out of Libya — which called for a force majeure in exports — and Norway, where an oil workers’ strike loomed.

Barely 24 hours after June’s price plunge — the first for a month since November — it was a sign that oil bulls had recaptured at least some of their mojo even as an impending recession threatened market outlook over the coming months.

“Crude is rebounding on the back of the quarter-end selling being done and more issues in Libya,” said Scott Shelton, energy futures broker at ICAP) in Durham, North Carolina.

“It’s so easy to look at all of this and just be bullish. My sense is that people are just heading to the sidelines as they are tired of the extreme noise and  ‘hot takes’ on demand destruction and recession fears. At some point, crude oil prices are going to make a parabolic move in my view that will be led by the physical market as there simply isn’t enough oil production to offset refiner demand with the losses from Libya, Russia and OPEC constantly failing to make [its] quota.”

U.K. bank Barclays, a typical cheerleader for oil, concurred, saying it “still see[s] risks to prices as skewed to the upside on tight inventories, limited spare capacity and muted non-OPEC+ supply response.”

New York-traded West Texas Intermediate, or WTI, settled up $2.67, or 2.5%, at $108.43 per barrel. The U.S. crude benchmark finished June down more than 7%.

London-traded Brent crude, the global benchmark for oil, was up $2.11, or 1.9%, to $111.14 by 2:38 PM ET (18:38 GMT) on its most-active September contract. It fell nearly 6% for all of last month.

Libya’s National Oil Corporation, or NOC, declared force majeure on Thursday at the Es Sider and Ras Lanuf ports as well as the El Feel oilfield. Force majeure was also in effect at the ports of Brega and Zueitina, Reuters said in a report.

It said production at NOC has seen a sharp decline, with daily exports ranging between 365,000 and 409,000 bpd — a drop of 865,000 bpd compared to production in “normal circumstances.”

Elsewhere, 74 Norwegian offshore oil workers at Equinor’s Gudrun, Oseberg South and Oseberg East platforms will go on strike from July 5, likely halting about 4% of Norway’s oil production, the Lederne trade union was quoted saying on Thursday,

Offsetting some of the bullish impact from the events in Libya and Norway was news that Ecuador’s government and indigenous groups’ leaders have reached agreement to end more than two weeks of protests that had led to the shut-in of more than half of the country’s pre-crisis 500,000 bpd oil output.

Over the next two months though, oil market participants have two major challenges coming their way that could pull prices in both directions: the Atlantic hurricane season and an increasingly-likely U.S. recession.

While hurricanes come and go each year, any storm in 2022 could have a rippling impact on energy infrastructure, supply and prices due to the squeeze already on barrels from sanctions piled on Russia; the apparent inability of OPEC+ to produce what consuming countries want; and US shale being slower than ever in returning to its pre-pandemic drilling glory.

“You cannot afford to lose a single barrel this summer. That’s the reality,” said John Kilduff, founding partner of New York energy hedge fund Again Capital.

Equally crippling to oil could be the evolving recession in the United States.

US gross domestic product likely contracted by an estimated 1% in the second quarter of 2022, the Atlanta Federal Reserve said on Thursday. It was the first official forecast of recession by a division of the central bank, after the 1.6% economic decline in the first quarter. 

Economists say the recession narrative could get uglier over the next 30 to 60 days as the Fed continues tightening the screws on US interest rates.

With officials at the central bank racing to remove liquidity as quickly as possible from the financial system for the Fed’s rate hikes to have a maximum neutralizing impact on inflation, there is always the danger of leaving markets illiquid in a sudden turn of events.

Economists say the United States may be witnessing the beginnings of a real economic shakedown, only that it’s too numb to notice because of the miraculous resilience of its consumers insulated by two years of pandemic aid money; a housing market still running on that old stimulus energy; and stock markets often coming back after a few days of selloffs.

But U.S. consumers won’t be superheroes forever and the slide into the economic abyss could come faster than thought, warn analysts.

In oil markets especially, “the prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude [even] as China reopened” from COVID shutdowns, said Craig Erlam, analyst at online trading platform OANDA.

On Thursday, oil producer alliance OPEC+ confirmed a previously-agreed production of nearly 650,000 barrels per day for July and August — up more than 50% from June.

The Saudi-led and Russia-supported alliance of 23 oil producers said the higher output will be necessary to meet demand projected over the next two months from people making up for road and air travel limited in the past two summers by the coronavirus pandemic.

Yet, OPEC+ avoided discussing policy from September onwards — signaling that it wasn’t sure itself of demand beyond the summer.