Oil futures: Brent rebounds as markets torn between economic growth, supply fears

19 Sep 2022

Quantum Commodity Intelligence - Brent futures rebounded from earlier losses Monday with oil markets again torn between recessionary fears on the one side, pitched against concerns over tight supplies as the embargo on Russian crude draws closer.

Front-month November ICE Brent futures were trading at $91.71/b (1910 GMT), compared the day's low of $88.50/b and Friday's settle of $91.35/b.  

At the same time, October NYMEX WTI was trading $85.29/b versus Friday's settle of $85.11/b, while the more-liquid Nov22 contract was trading at $85.07/b, versus Friday's $84.76/b

The expected steep US rate hike later this week initially weighed on markets, with GDP and oil demand forecasts increasingly turning bearish.

“Fundamentals are not looking that great at all,” said Adi Imsirovic, Senior Research Fellow at the Oxford Institute for Energy Studies, noting last week’s collapse in gasoil cracks and the overall weakness in refining margins.

“The reason we are seeing the oil market where it is, despite the geopolitical issues, is the fear of demand destruction and a recession,” Imsirovic told Sunday’s Gulf Intelligence energy markets podcast.

Goldman Sachs on Friday cut its US economic growth estimates for 2023 after expectations of a 0.75% Federal Reserve interest rate hike. The investment bank said growth will increase 1.1% in 2023, economists including Jan Hatzius wrote in a note on Friday, compared with a forecast of 1.5% previously.

The Chinese megacity of Chengdu will lift all lockdowns from Monday, after a city-wide lockdown was imposed on 1 September to contain a Covid-19 outbreak, the local government announced over the weekend.

However, restrictions remain in place across dozens of other cities.

Supply

The EU ban on seaborne crude imports from Russia comes into effect on 5 December, although Moscow could reduce supplies before in a retaliatory move after Germany seized assets from state-owned Rosneft last week.

In addition to concerns over Russian supplies, output from OPEC+ was around 3.6 million bpd under the target level in August, according to the latest report from the producer alliance, based on surveys from seven data suppliers.

The US government has also confirmed that the SPR release program will come to an end in October, effectively removing 1 million bpd from the market.

"Once we stop releasing oil from the Strategic Petroleum Reserve we're going to start to see big drawdowns in supply. China is already talking about reopening refineries more than likely so that they can refine Russian oil and send the product to Europe," commented Phil Flynn of The Price Futures Group, although noting there may be some short-term weakness due to recession fears.

Bank of America said Monday oil prices will average $100 a barrel in 2023 as demand rebounds in China, while Russian crude supplies are reduced. 

"On the global oil demand side, we now forecast that the Asian region will deliver 86% of the 1.7 million bpd of oil consumption growth that we project for next year, compared to just 19% of the 2 million bpd that we expect for 2022," the banks said  in a note Monday.

North American drilling activity increased during the week to 14 September, with Texas and the Permian Basin leading the rebound, oilfield services firm Baker Hughes reported.

The total weekly rig count was up by four units to 763 and an increase of around 50% from the 512 at the same stage in 2021.